the world economy between world wars- chapter 1 (apples's conflicted copy 2015-04-14)
TRANSCRIPT
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6
Chapter 1
The Interwar Economy ina Secular Perspective
11 Modern Economic Growth in aTwentieth-Century Perspective
The years between the two world wars were turbulent both politically and
economically This book chronicles the economic events of those years To
understand them fully the events noted here must be seen in the context of
preceding and succeeding events We start therefore by placing the interwaryears in the context of modern economic growth This sustained growth in per
capita incomes started a century before the period described here but it had
affected only part of the world economy by the time our story begins
During the 1047297rst part of the nineteenth century and in some regions for long
after that the standard of livingmdashdiet clothing housing life expectancy and
literacymdashof the average peasant family in the most advanced areas of western
Europe and North America had far more in common with the standard of
living of their medieval ancestors serving on feudal manors than with theirpostndashSecond World War great-grandchildren Most industrial workers did not
fare much better packed as they were in 1047297lthy cities and burdened from child-
hood with long working weeks in unhealthy working conditions
An Italian working-class family of four had an average monthly consump-
tion in the early 1990s of about $1600 In the 1890s that family had to sur-
vive on less than $180 (in1047298ation-adjusted) out of which they also had to cover
expenses for health care and education now provided free by the state Such a
low level of consumption allowed for bare subsistence on a diet that includedmeat only on rare occasions and left little for tobacco and a glass of cheap wine
in the local osteriamdashand that only for the head of the household (Rossi and
Toniolo 1993)
The large majority of people living outside of western Europe and the so-
called European overseas offshoots survived on an amount of resources possi-
bly 30 to 50 percent lower than those available to the masses in the areas of the
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world where an ldquoindustrial revolutionrdquo of some kind had sparked the trans-
formation of the daily life of ordinary people for which Simon Kuznets coined
the term ldquomodern economic growthrdquo At the heart of this process the most
far-reaching revolution in the history of mankind Kuznets saw an ldquoepochalinnovationrdquo consisting of the ldquospreading application of science to processes of
production and social organizationrdquo (Kuznets 1966 p 487)
Kuznets showed that those countries in which modern economic growth
occurs experience a number of similar quantitative developments related to the
long-run rates of growth of aggregate and sectoral production consumption
and saving patterns and structural changes in the economy Modern economic
growth is typically characterizedmdashand some would say de1047297ned bymdashldquohigh
rates of increase in per capita product ranging from less than 15 to about30 per cent per decaderdquo (Kuznets 1966 p 490) Its main features include an
acceleration in the growth of population and consumption a rise in savings
and investment ratios and a shift in the composition of GDP away from agri-
culture Aggregate product derives increasingly from the manufacturing and
service sectors with a similar change in the pattern of consumption
Kuznets also saw a tremendous increase in the international movement of
goods services and factors of production as a prominent feature of modern
economic growth A rapid increase in cross-border trade and factor mobilitywas however neither constant nor irreversible Historians talk about a ldquo1047297rst
globalizationrdquo taking place roughly between 1860 and 1913 a ldquoglobaliza-
tion backlashrdquo during the years covered by this book and a resumption of
international economic integration after 1945 taking place slowly at 1047297rst and
then gaining strength It was probably only in the 1990s that trade and capital
mobility again reached the weight in the world economy that they had attained
at the beginning of the century allowing scholars to identify a ldquosecond global-
izationrdquo Labor mobility however has never again been as pronounced as itwas before the First World War
Before introducing the overall quantitative dimensions of the 1914ndash1945
ldquoglobalization backlashrdquo the topic of this book letrsquos take a brief look at some
of the secular trends in the world economy in order to better understand the
peculiarities of the interwar years
In the early part of the nineteenth century modern economic growth
had spread from its cradle in England to Belgium France Switzerland the
Rhineland and the United States Some decades later it reached Prussia and
the Scandinavian countries and eventually it spread to some parts of Russia
and central Europe to the Italian and Iberian peninsulas in the Mediterranean
to Canada and Argentina in the Americas and to parts of Oceania Japan
was the only country outside the areas of European settlement where a robust
process of modern economic growth took place in the nineteenth century It
was only after the Second World War that industrialization and GDP-growth
acceleration became an increasingly common feature of other countries
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particularly in Asia The progress of Latin America was less buoyant patchierand more prone to reversals of fortune Sub-Saharan Africa with the excep-
tion of the Cape region remained almost entirely cut off from the spread of
modern economic growth Even in many industrial countries workers still had
not derived much bene1047297t from this process before World War I
Table 11 puts the years between the two World Wars in the context of
long-term modern economic growth For a period of almost 130 years from
1870 to the end of the twentieth century the worldrsquos annual rate of increase in
the real GDP per capitamdasha rough proxy for the standard of livingmdashaveragedabout 15 percent per annum
Even a quick glance at table 11 will reveal two features of the long-term
growth of the world economy the uneven path of growth both across regions
and over time Economists do indeed expect productivity (proxied by GDP per
capita) growth to differ across countries and regions but their assumption is
that backward areas will catch up with the more advanced ones The history of
modern economic growth tends to show that if anything the opposite has been
the case for a long period of time In 1870 western Europe and the westernoffshoots were already more ldquoadvancedrdquo in terms of GDP per capita than the
worldrsquos average (about 2200 international dollars vs 867)1 yet their secular
growth rates have been higher than those of the initially poorer countries
1 At 1990 purchasing power
Table 11 Average annual rates of growth 1870ndash1998 world and main regions
1870ndash1998 1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1998
World 148 130 091 293 133
Western
Europea
174 132 076 408 178
Western
offshootsb
187 181 155 244 194
Japan 263 148 089 805 234
Asia (excluding
Japan)
133 038 ndash002 292 354
Latin America 141 181 142 252 099
Eastern
Europec
122 115 150 349 ndash110
Africa 088 064 102 207 001
Note Estimates are weighted averagesa Twenty-nine western European countriesb Australia New Zealand Canada and the United Statesc Seven eastern European countries and Russiathe Soviet Union
Source Maddison (2001) 126 and passim
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Divergence rather than convergence towards the productivity leaders has
tended to characterize the long-run growth process of the world economy at
least until the 1980s The big exception the rapid catcher-up has been Japan
Rates of growth also differed over time beyond the normal cyclical1047298uc-tuations suggesting that in each given period in table 11 factors such as
technology institutions and economic policies affected the world economy in
different ways
As shown in table 11 during the 1047297rst (1870ndash1913) and the last (1973ndash1998)
periods real per capita GDP in western Europe and the western offshoots grew
at about the average secular rate In contrast the two other subperiods deviate
sharply from this trend In the 1950s and 1960s the economies of western
Europe grew at a rate twice as high as the secular trend This tremendousincrease in production and the full employment that accompanied it turned
out to be compatible with low in1047298ation and overall external stability at least
until the mid-1960s The western offshoots also outperformed secular average
growth if in a less spectacular fashion
While the rapid growth from 1950 to 1973 looks like a golden age of economic
growth the preceding period from 1913 to 1950 appears to be a pause in the
onward progress of rising per capita income Almost every area distinguished
in table 11 grew more slowly in 1913ndash1950 than in the preceding period andfar more slowly than in the golden age The slowdown was particularly sharp in
western Europe which will occupy a prominent place in this narrative
This brief survey of the aggregate changes in the world economy since 1870
was intended to put the interwar years the subject of this volume in a longer-
term perspective that should help us to better understand the speci1047297c features
of those momentous de1047297ning years We now turn to a brief exposition of the
main macroeconomic aspects of the interwar period by way of introduction to
the speci1047297
c issues dealt with in the following chapters
12 Some Quantitative Features of theInterwar Years
The marked slowdown in the worldrsquos real per capita growth between 1913 and
1950 provides the background to the present history Against this general back-
ground and before proceeding to analyze the various aspects of the international
economy during the interwar years it is useful to discuss brie1047298y a few ldquostyl-
ized factsrdquo that are prominent features of the aggregate quantitative changes
between 1913 and 1950 (or between 1921 and 1938 as may be the case) They
may be summarized as follows (1) while the slowdown in economic activity
was a worldwide phenomenon it affected individual areas in quite different
ways (2) the overall slowdown was the result of quite satisfactory rates in the
1920s and of dismal economic performance in the 1930s (3) far from keeping
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pace with output trends international trade declined in real terms (4) high and
structural unemployment was the shocking new phenomenon of those years
and (5) labor productivity increased more rapidly than in 1890ndash1913 the pace
achieved in the 1920s was particularly good
Slower Growth
Table 12 shows that the reduction in the growth of real per capita GDP
between 1870 and 1913 and between 1913 and 1950 characterized all the
regions in the table except for the Soviet Union which was the most notable
exception to the general gloom of the 1930s (see table 12)
There is one dominant explanation for the severity of the European slow-
down between 1913 and 1950 (and paradoxically also for the golden age of
the 1950s and 1960s) war The catastrophic impact of two global military con-
1047298icts both fought with unprecedented destructive strength on European soil
explains the poor performance of western Europe relative to North America
its main competitor and trading partner During 1913ndash1921 western Europersquos
output declined on average by 12 percent per annum while GDP per capita in
the United States remained roughly constant During 1938ndash1950 the United
States enjoyed its fastest growth on record for a period of comparable length
38 percent per annum while Western Europe only grew by 03 percent per
annum This is why in what follows special emphasis will be placed on the
immediate and long-term effects of the Great War (including among the latter
the second global con1047298agration of 1939ndash1945) On the other hand in 1921ndash
1938 Europersquos growth considerably exceeded that of the United States Japanrsquos
record (1913ndash1950) was also deeply affected by the Second World War
Growth deceleration in Latin America was roughly in line with that of the
western offshoots in North America and Oceania Most of Asia (excluding
Japan) which had remained quite untouched by the growth acceleration pro-
cess of the ldquo1047297rst globalizationrdquo (1870ndash1913) experienced a long-term decline
in output and welfare during the period covered by this book
Table 12 Growth of real GDP per capita in Europe the United States Latin
America Japan China India and the Soviet Union 1913ndash1950 (average
annual rates of growth)
Western
Europe
United
States
Latin
America
Japan China India Soviet
Union
1913ndash50 08 18 14 09 ndash08 ndash03 11
1921ndash38 20 08 14 18 na ndash01 na
1921ndash29 35 33 26 20 na 09 na
1929ndash38 07 ndash13 04 17 0 ndash10 49
Source Maddison (2001) 104ndash11 180ndash87
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983124 I 983109 983145 983123u 983120p983145v 11
As already mentioned the Soviet Union in the 1930s provided a striking
contrast to the dismal performance of most of the market economies Even
allowing for recent revisions of earlier Soviet and western estimates total GDP
growth in the Soviet Union averaged 530 percent per annum between 1928and 1940 (Allen 2003 217) in striking contrast to the dim performance of
the worldrsquos other main areas Given the record of the Soviet Unionrsquos planned
economy it is no wonder that the Third International could tout the Soviet
Unionrsquos performance as the ldquoproofrdquo of the superiority of the socialist system
nor is it surprising that many in the West prophesied the end of capitalism
including Mussolini and Hitler who preached and practiced their own sup-
posed ldquothird wayrdquo between the two systems Needless to say the subsequent
development of the world economy proved the resilience of well-run marketeconomies
The whole period stands out as one of major divisions and lack of coopera-
tion with devastating results for the pace of economic progress This is shown
among other things by the above-average performance in 1913ndash1950 of coun-
tries that remained consistently neutral such as Sweden and Switzerland
The ldquoGlobalization Backlashrdquo
It has become common for scholars to refer to the second of the quantitative
ldquostylized factsrdquo outlined abovemdashnamely the disruption of international trade
and the sharp reduction in the cross-border movements of factors of produc-
tion (capital and labor)mdashas ldquoglobalization backlashrdquo
International movements of goods services capital and labor typically
depend on two sets of factors technology which reduces transport and com-
munication costs and institutions both domestic and international that may
either favor or hinder international economic integration Transport and com-
munication technology continued to improve in the period under consider-
ation not least due to military research and developments stimulated by the
First World War Larger and more energy-ef 1047297cient ships reduced the unit cost
of sea transport Developments in the internal combustion engine provided
a competitive alternative to railways in land transport for both people and
goods A passenger airline industry took off providing ever-safer and pro-
gressively cheaper services Telephone and radio revolutionized international
communication having a particularly strong impact on 1047297nancial market inte-
gration All other things being equal therefore technology created increas-
ingly favorable conditions for cross-border economic integration Therefore
we must seek other reasons to explain why August 1914 put an end to a long
era of progressive if slow integration of the world economy an era that then
came to be known as the ldquobelle eacutepoquerdquo and that we now call ldquo1047297rst globaliza-
tionrdquo As mentioned above continuous tension misunderstandings and lack
of cooperation characterized international relations in 1919ndash1938 resulting
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in the creation of an institutional environment inimical to trade and to the
cross-border movement of peoplemdashand in the 1930s of capital as well On
the domestic front countries were busy erecting tariff and nontariff walls
limiting immigration and minutely regulating international1047297
nancial transac-tions The international monetary system painfully re-created in the 1920s
collapsed early in the next decade International economic organizations
such as the economic commission of the League of Nations and the Bank for
International Settlements were almost powerless in a context of extremely
strained international relations On balance man-made obstacles outweighed
the favorable impact of technology on international economic transactions
Pre-1913 globalization was put in reverse
In 1870ndash1913 the income elasticity of world exports was certainly greaterthan 1 and probably close to 2 In the subsequent sixteen years international
trade growth slowed down everywhere in 1929ndash1950 it almost stagnated (see
table 13) Europersquos trade performance stands out as particularly disappoint-
ing Japanrsquos exports grew rapidly in the 1920s while they decreased in the
1930s in spite of a fairly good output growth marking the shift to autarky
imposed by the military regime The export performance of the United States
was twice as good as the worldrsquos average in the 1920s While US export
performance sharply decreased in the subsequent decade it still remained wellabove average
Europe was largely responsible for the dramatic fall in international trade
growth during the Great War and the interwar years In the 1930s the volume
of western European exports actually declined Europersquos sluggish trade impact
on the Atlantic routes both North and South depressed trade from and to the
Americas as well
Table 13 Growth of value of merchandise exports at constant prices for twenty-four countries (annual average rates)
1870ndash1913 1913ndash1929 1929ndash1950 1950ndash1973 1973ndash1998
Western
Europea
323 021 ndash032 803 455
United States 486 333 168 627 598
RussiaSoviet
Union
na ndash466 308 998 295
Latin Americab 340 389 146 410 570China 259 290 006 274 1181
India 237 ndash102 ndash190 246 594
Japan 847 700 ndash097 1554 530
World 335 089 788 507
a Twelve countriesb Seven countries
Source Maddison (2001) 361ndash62
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As the result of the interwar trade trends western Europersquos share of world
exports declined from 601 percent in 1913 to 411 percent in 1950 highlight-
ing one of the structural changes in the world economy brought about by
two world wars and the Great Depression the shift of the center of the worldeconomy away from western Europe
As a feature of the interwar globalization backlash migration 1047298ows
stand out even more strikingly than trade In the century after 1820 about
55 million Europeans left the continent In the twentieth century war and
the United States Immigration Acts which introduced immigrant quotas by
national origin put an end to the ldquoage of mass migrationrdquo which was a
salient aspect of the 1047297rst globalization The depression of the 1930s with
the attendant mass unemployment in the New World further depressed the1047298ow of people crossing the Atlantic Intra-European migrations were also
somewhat reduced
If voluntary migration sharply decreased forced migration increased
highlighting the most tragic features of the European interwar history
Persecution made Jews leave central Europe in the 1930s Spaniards left for
Mexico during the Spanish Civil War Poles and Baltic people were forcibly
deported to Siberia
Cross-border capital1047298
ows reached an all-time peak in 1913 They becamea casualty of the Great War and remained depressed in the following two
decades characterized as they were by administrative controls on cross-border
monetary transactions (the so-called ldquoexchange controlsrdquo) and by uncertainty
regarding future exchange rates
The Rise in Unemployment between the Wars
High unemployment rates particularly but not exclusively in the 1930s stand
out in collective memories as the most deeply felt economic feature of the
interwar period Visual artists and writers as well as a largely diffused oral
tradition have passed on stories of homeless people long queues for a free
meal workers sitting idle outside their humble dwellings helpless families
discouraged long-term unemployed people Photographs paintings and novels
describe the Great Depression in North America and Europe in quite similar
fashions meaning that as far as unemployment is concerned in the 1930s the
contrast between the two sides of the Atlantic was not perceived to be very
pronounced On the contrary a contrast existed in the 1920s when in many
European countries a fairly large number of people were out of work while
the United States experienced almost full employment
Comparing unemployment over time and across countries is a daunting task
The term ldquounemploymentrdquo appeared for the 1047297rst time only in 1888 (Royal
Institute of International Affairs 1935 26) the compilation of of 1047297cial sta-
tistics began much later Moreover because such statistics often derived from
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the records either of those receiving some sort of bene1047297t or of those register-
ing with labor-exchange of 1047297ces they depend heavily on speci1047297c institutional
arrangements in individual countries It is thus impossible to make an accuratecomparison of the levels of interwar unemployment with those prevailing in
the quarter of a century before 1914 However there seems to be some con-
sensus among scholars that unemployment before the First World War was of
shorter average duration than that experienced after 1918
More can be said about the relative magnitude of the phenomenon in the
interwar period and the years after the Second World War Table 14 covers
only a few western European countries and may not be very precise as far as the
absolute levels of unemployment rates are concerned but it probably providesa broadly correct indication of relative variations across time (Eichengreen and
Hatton 1988 7) Exceptionally high unemployment rates stand out as a fea-
ture of the 1930s while unemployment in the 1960s was exceptionally low At
the same time the relative number of those out of work in the troubled decade
of the 1920s looks on average to be broadly comparable with that of the 1980s
and early 1990s an aspect we shall return to in the concluding chapter
Productivity Continues to Improve
While the number of unemployed rose available evidence shows that product
per hour worked by those who retained their jobs continued to increase From
1913 to 1950 the pace of productivity growth in western Europe was roughly
the same as in the previous half century In the United States productivity
growth was more rapid than in the pre-1914 decades Productivity growth in
Japan on the other hand slowed down (see table 15)
There are three plausible reasons why productivity continued to grow in the
period under review in spite of the disruption of human and physical capital
brought about by two world wars and of the interwar globalization backlash
The 1047297rst is that the 1920s and 1930s were rich in technological innovations
A number of inventions produced by the pre-1913 ldquosecond industrial revolu-
tionrdquo had a measurable impact on aggregate output only during or after the
war This was the case for instance with regard to the internal combustion
engine the assembly line pioneered by Henry Ford and the electrical network
Table 14 Average European unemployment rates 1921ndash1993 (percent)
1921ndash1929 1930ndash1938 1950ndash1959 1960ndash1973 1974ndash1981 1982ndash1989 1990ndash1993
83 158 42 25 52 88 92
Note Arithmetic average of average annual unemployment rates 1921ndash1938 covers France Germany and the
United Kingdom for 1950ndash1993 Italy is also included
Sources For 1921ndash1938 Galenson and Zellner (1957) 455 For 1950ndash1993 Maddison (1991) 262 and OECD
data from Crafts and Toniolo (1996) 7
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and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
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983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
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between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
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983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
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The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
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983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
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983124 I 983109 983145 983123u 983120p983145v 7
world where an ldquoindustrial revolutionrdquo of some kind had sparked the trans-
formation of the daily life of ordinary people for which Simon Kuznets coined
the term ldquomodern economic growthrdquo At the heart of this process the most
far-reaching revolution in the history of mankind Kuznets saw an ldquoepochalinnovationrdquo consisting of the ldquospreading application of science to processes of
production and social organizationrdquo (Kuznets 1966 p 487)
Kuznets showed that those countries in which modern economic growth
occurs experience a number of similar quantitative developments related to the
long-run rates of growth of aggregate and sectoral production consumption
and saving patterns and structural changes in the economy Modern economic
growth is typically characterizedmdashand some would say de1047297ned bymdashldquohigh
rates of increase in per capita product ranging from less than 15 to about30 per cent per decaderdquo (Kuznets 1966 p 490) Its main features include an
acceleration in the growth of population and consumption a rise in savings
and investment ratios and a shift in the composition of GDP away from agri-
culture Aggregate product derives increasingly from the manufacturing and
service sectors with a similar change in the pattern of consumption
Kuznets also saw a tremendous increase in the international movement of
goods services and factors of production as a prominent feature of modern
economic growth A rapid increase in cross-border trade and factor mobilitywas however neither constant nor irreversible Historians talk about a ldquo1047297rst
globalizationrdquo taking place roughly between 1860 and 1913 a ldquoglobaliza-
tion backlashrdquo during the years covered by this book and a resumption of
international economic integration after 1945 taking place slowly at 1047297rst and
then gaining strength It was probably only in the 1990s that trade and capital
mobility again reached the weight in the world economy that they had attained
at the beginning of the century allowing scholars to identify a ldquosecond global-
izationrdquo Labor mobility however has never again been as pronounced as itwas before the First World War
Before introducing the overall quantitative dimensions of the 1914ndash1945
ldquoglobalization backlashrdquo the topic of this book letrsquos take a brief look at some
of the secular trends in the world economy in order to better understand the
peculiarities of the interwar years
In the early part of the nineteenth century modern economic growth
had spread from its cradle in England to Belgium France Switzerland the
Rhineland and the United States Some decades later it reached Prussia and
the Scandinavian countries and eventually it spread to some parts of Russia
and central Europe to the Italian and Iberian peninsulas in the Mediterranean
to Canada and Argentina in the Americas and to parts of Oceania Japan
was the only country outside the areas of European settlement where a robust
process of modern economic growth took place in the nineteenth century It
was only after the Second World War that industrialization and GDP-growth
acceleration became an increasingly common feature of other countries
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983124 983127 983109 983127 9831278
particularly in Asia The progress of Latin America was less buoyant patchierand more prone to reversals of fortune Sub-Saharan Africa with the excep-
tion of the Cape region remained almost entirely cut off from the spread of
modern economic growth Even in many industrial countries workers still had
not derived much bene1047297t from this process before World War I
Table 11 puts the years between the two World Wars in the context of
long-term modern economic growth For a period of almost 130 years from
1870 to the end of the twentieth century the worldrsquos annual rate of increase in
the real GDP per capitamdasha rough proxy for the standard of livingmdashaveragedabout 15 percent per annum
Even a quick glance at table 11 will reveal two features of the long-term
growth of the world economy the uneven path of growth both across regions
and over time Economists do indeed expect productivity (proxied by GDP per
capita) growth to differ across countries and regions but their assumption is
that backward areas will catch up with the more advanced ones The history of
modern economic growth tends to show that if anything the opposite has been
the case for a long period of time In 1870 western Europe and the westernoffshoots were already more ldquoadvancedrdquo in terms of GDP per capita than the
worldrsquos average (about 2200 international dollars vs 867)1 yet their secular
growth rates have been higher than those of the initially poorer countries
1 At 1990 purchasing power
Table 11 Average annual rates of growth 1870ndash1998 world and main regions
1870ndash1998 1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1998
World 148 130 091 293 133
Western
Europea
174 132 076 408 178
Western
offshootsb
187 181 155 244 194
Japan 263 148 089 805 234
Asia (excluding
Japan)
133 038 ndash002 292 354
Latin America 141 181 142 252 099
Eastern
Europec
122 115 150 349 ndash110
Africa 088 064 102 207 001
Note Estimates are weighted averagesa Twenty-nine western European countriesb Australia New Zealand Canada and the United Statesc Seven eastern European countries and Russiathe Soviet Union
Source Maddison (2001) 126 and passim
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983124 I 983109 983145 983123u 983120p983145v 9
Divergence rather than convergence towards the productivity leaders has
tended to characterize the long-run growth process of the world economy at
least until the 1980s The big exception the rapid catcher-up has been Japan
Rates of growth also differed over time beyond the normal cyclical1047298uc-tuations suggesting that in each given period in table 11 factors such as
technology institutions and economic policies affected the world economy in
different ways
As shown in table 11 during the 1047297rst (1870ndash1913) and the last (1973ndash1998)
periods real per capita GDP in western Europe and the western offshoots grew
at about the average secular rate In contrast the two other subperiods deviate
sharply from this trend In the 1950s and 1960s the economies of western
Europe grew at a rate twice as high as the secular trend This tremendousincrease in production and the full employment that accompanied it turned
out to be compatible with low in1047298ation and overall external stability at least
until the mid-1960s The western offshoots also outperformed secular average
growth if in a less spectacular fashion
While the rapid growth from 1950 to 1973 looks like a golden age of economic
growth the preceding period from 1913 to 1950 appears to be a pause in the
onward progress of rising per capita income Almost every area distinguished
in table 11 grew more slowly in 1913ndash1950 than in the preceding period andfar more slowly than in the golden age The slowdown was particularly sharp in
western Europe which will occupy a prominent place in this narrative
This brief survey of the aggregate changes in the world economy since 1870
was intended to put the interwar years the subject of this volume in a longer-
term perspective that should help us to better understand the speci1047297c features
of those momentous de1047297ning years We now turn to a brief exposition of the
main macroeconomic aspects of the interwar period by way of introduction to
the speci1047297
c issues dealt with in the following chapters
12 Some Quantitative Features of theInterwar Years
The marked slowdown in the worldrsquos real per capita growth between 1913 and
1950 provides the background to the present history Against this general back-
ground and before proceeding to analyze the various aspects of the international
economy during the interwar years it is useful to discuss brie1047298y a few ldquostyl-
ized factsrdquo that are prominent features of the aggregate quantitative changes
between 1913 and 1950 (or between 1921 and 1938 as may be the case) They
may be summarized as follows (1) while the slowdown in economic activity
was a worldwide phenomenon it affected individual areas in quite different
ways (2) the overall slowdown was the result of quite satisfactory rates in the
1920s and of dismal economic performance in the 1930s (3) far from keeping
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983124 983127 983109 983127 98312710
pace with output trends international trade declined in real terms (4) high and
structural unemployment was the shocking new phenomenon of those years
and (5) labor productivity increased more rapidly than in 1890ndash1913 the pace
achieved in the 1920s was particularly good
Slower Growth
Table 12 shows that the reduction in the growth of real per capita GDP
between 1870 and 1913 and between 1913 and 1950 characterized all the
regions in the table except for the Soviet Union which was the most notable
exception to the general gloom of the 1930s (see table 12)
There is one dominant explanation for the severity of the European slow-
down between 1913 and 1950 (and paradoxically also for the golden age of
the 1950s and 1960s) war The catastrophic impact of two global military con-
1047298icts both fought with unprecedented destructive strength on European soil
explains the poor performance of western Europe relative to North America
its main competitor and trading partner During 1913ndash1921 western Europersquos
output declined on average by 12 percent per annum while GDP per capita in
the United States remained roughly constant During 1938ndash1950 the United
States enjoyed its fastest growth on record for a period of comparable length
38 percent per annum while Western Europe only grew by 03 percent per
annum This is why in what follows special emphasis will be placed on the
immediate and long-term effects of the Great War (including among the latter
the second global con1047298agration of 1939ndash1945) On the other hand in 1921ndash
1938 Europersquos growth considerably exceeded that of the United States Japanrsquos
record (1913ndash1950) was also deeply affected by the Second World War
Growth deceleration in Latin America was roughly in line with that of the
western offshoots in North America and Oceania Most of Asia (excluding
Japan) which had remained quite untouched by the growth acceleration pro-
cess of the ldquo1047297rst globalizationrdquo (1870ndash1913) experienced a long-term decline
in output and welfare during the period covered by this book
Table 12 Growth of real GDP per capita in Europe the United States Latin
America Japan China India and the Soviet Union 1913ndash1950 (average
annual rates of growth)
Western
Europe
United
States
Latin
America
Japan China India Soviet
Union
1913ndash50 08 18 14 09 ndash08 ndash03 11
1921ndash38 20 08 14 18 na ndash01 na
1921ndash29 35 33 26 20 na 09 na
1929ndash38 07 ndash13 04 17 0 ndash10 49
Source Maddison (2001) 104ndash11 180ndash87
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983124 I 983109 983145 983123u 983120p983145v 11
As already mentioned the Soviet Union in the 1930s provided a striking
contrast to the dismal performance of most of the market economies Even
allowing for recent revisions of earlier Soviet and western estimates total GDP
growth in the Soviet Union averaged 530 percent per annum between 1928and 1940 (Allen 2003 217) in striking contrast to the dim performance of
the worldrsquos other main areas Given the record of the Soviet Unionrsquos planned
economy it is no wonder that the Third International could tout the Soviet
Unionrsquos performance as the ldquoproofrdquo of the superiority of the socialist system
nor is it surprising that many in the West prophesied the end of capitalism
including Mussolini and Hitler who preached and practiced their own sup-
posed ldquothird wayrdquo between the two systems Needless to say the subsequent
development of the world economy proved the resilience of well-run marketeconomies
The whole period stands out as one of major divisions and lack of coopera-
tion with devastating results for the pace of economic progress This is shown
among other things by the above-average performance in 1913ndash1950 of coun-
tries that remained consistently neutral such as Sweden and Switzerland
The ldquoGlobalization Backlashrdquo
It has become common for scholars to refer to the second of the quantitative
ldquostylized factsrdquo outlined abovemdashnamely the disruption of international trade
and the sharp reduction in the cross-border movements of factors of produc-
tion (capital and labor)mdashas ldquoglobalization backlashrdquo
International movements of goods services capital and labor typically
depend on two sets of factors technology which reduces transport and com-
munication costs and institutions both domestic and international that may
either favor or hinder international economic integration Transport and com-
munication technology continued to improve in the period under consider-
ation not least due to military research and developments stimulated by the
First World War Larger and more energy-ef 1047297cient ships reduced the unit cost
of sea transport Developments in the internal combustion engine provided
a competitive alternative to railways in land transport for both people and
goods A passenger airline industry took off providing ever-safer and pro-
gressively cheaper services Telephone and radio revolutionized international
communication having a particularly strong impact on 1047297nancial market inte-
gration All other things being equal therefore technology created increas-
ingly favorable conditions for cross-border economic integration Therefore
we must seek other reasons to explain why August 1914 put an end to a long
era of progressive if slow integration of the world economy an era that then
came to be known as the ldquobelle eacutepoquerdquo and that we now call ldquo1047297rst globaliza-
tionrdquo As mentioned above continuous tension misunderstandings and lack
of cooperation characterized international relations in 1919ndash1938 resulting
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in the creation of an institutional environment inimical to trade and to the
cross-border movement of peoplemdashand in the 1930s of capital as well On
the domestic front countries were busy erecting tariff and nontariff walls
limiting immigration and minutely regulating international1047297
nancial transac-tions The international monetary system painfully re-created in the 1920s
collapsed early in the next decade International economic organizations
such as the economic commission of the League of Nations and the Bank for
International Settlements were almost powerless in a context of extremely
strained international relations On balance man-made obstacles outweighed
the favorable impact of technology on international economic transactions
Pre-1913 globalization was put in reverse
In 1870ndash1913 the income elasticity of world exports was certainly greaterthan 1 and probably close to 2 In the subsequent sixteen years international
trade growth slowed down everywhere in 1929ndash1950 it almost stagnated (see
table 13) Europersquos trade performance stands out as particularly disappoint-
ing Japanrsquos exports grew rapidly in the 1920s while they decreased in the
1930s in spite of a fairly good output growth marking the shift to autarky
imposed by the military regime The export performance of the United States
was twice as good as the worldrsquos average in the 1920s While US export
performance sharply decreased in the subsequent decade it still remained wellabove average
Europe was largely responsible for the dramatic fall in international trade
growth during the Great War and the interwar years In the 1930s the volume
of western European exports actually declined Europersquos sluggish trade impact
on the Atlantic routes both North and South depressed trade from and to the
Americas as well
Table 13 Growth of value of merchandise exports at constant prices for twenty-four countries (annual average rates)
1870ndash1913 1913ndash1929 1929ndash1950 1950ndash1973 1973ndash1998
Western
Europea
323 021 ndash032 803 455
United States 486 333 168 627 598
RussiaSoviet
Union
na ndash466 308 998 295
Latin Americab 340 389 146 410 570China 259 290 006 274 1181
India 237 ndash102 ndash190 246 594
Japan 847 700 ndash097 1554 530
World 335 089 788 507
a Twelve countriesb Seven countries
Source Maddison (2001) 361ndash62
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983124 I 983109 983145 983123u 983120p983145v 13
As the result of the interwar trade trends western Europersquos share of world
exports declined from 601 percent in 1913 to 411 percent in 1950 highlight-
ing one of the structural changes in the world economy brought about by
two world wars and the Great Depression the shift of the center of the worldeconomy away from western Europe
As a feature of the interwar globalization backlash migration 1047298ows
stand out even more strikingly than trade In the century after 1820 about
55 million Europeans left the continent In the twentieth century war and
the United States Immigration Acts which introduced immigrant quotas by
national origin put an end to the ldquoage of mass migrationrdquo which was a
salient aspect of the 1047297rst globalization The depression of the 1930s with
the attendant mass unemployment in the New World further depressed the1047298ow of people crossing the Atlantic Intra-European migrations were also
somewhat reduced
If voluntary migration sharply decreased forced migration increased
highlighting the most tragic features of the European interwar history
Persecution made Jews leave central Europe in the 1930s Spaniards left for
Mexico during the Spanish Civil War Poles and Baltic people were forcibly
deported to Siberia
Cross-border capital1047298
ows reached an all-time peak in 1913 They becamea casualty of the Great War and remained depressed in the following two
decades characterized as they were by administrative controls on cross-border
monetary transactions (the so-called ldquoexchange controlsrdquo) and by uncertainty
regarding future exchange rates
The Rise in Unemployment between the Wars
High unemployment rates particularly but not exclusively in the 1930s stand
out in collective memories as the most deeply felt economic feature of the
interwar period Visual artists and writers as well as a largely diffused oral
tradition have passed on stories of homeless people long queues for a free
meal workers sitting idle outside their humble dwellings helpless families
discouraged long-term unemployed people Photographs paintings and novels
describe the Great Depression in North America and Europe in quite similar
fashions meaning that as far as unemployment is concerned in the 1930s the
contrast between the two sides of the Atlantic was not perceived to be very
pronounced On the contrary a contrast existed in the 1920s when in many
European countries a fairly large number of people were out of work while
the United States experienced almost full employment
Comparing unemployment over time and across countries is a daunting task
The term ldquounemploymentrdquo appeared for the 1047297rst time only in 1888 (Royal
Institute of International Affairs 1935 26) the compilation of of 1047297cial sta-
tistics began much later Moreover because such statistics often derived from
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983124 983127 983109 983127 98312714
the records either of those receiving some sort of bene1047297t or of those register-
ing with labor-exchange of 1047297ces they depend heavily on speci1047297c institutional
arrangements in individual countries It is thus impossible to make an accuratecomparison of the levels of interwar unemployment with those prevailing in
the quarter of a century before 1914 However there seems to be some con-
sensus among scholars that unemployment before the First World War was of
shorter average duration than that experienced after 1918
More can be said about the relative magnitude of the phenomenon in the
interwar period and the years after the Second World War Table 14 covers
only a few western European countries and may not be very precise as far as the
absolute levels of unemployment rates are concerned but it probably providesa broadly correct indication of relative variations across time (Eichengreen and
Hatton 1988 7) Exceptionally high unemployment rates stand out as a fea-
ture of the 1930s while unemployment in the 1960s was exceptionally low At
the same time the relative number of those out of work in the troubled decade
of the 1920s looks on average to be broadly comparable with that of the 1980s
and early 1990s an aspect we shall return to in the concluding chapter
Productivity Continues to Improve
While the number of unemployed rose available evidence shows that product
per hour worked by those who retained their jobs continued to increase From
1913 to 1950 the pace of productivity growth in western Europe was roughly
the same as in the previous half century In the United States productivity
growth was more rapid than in the pre-1914 decades Productivity growth in
Japan on the other hand slowed down (see table 15)
There are three plausible reasons why productivity continued to grow in the
period under review in spite of the disruption of human and physical capital
brought about by two world wars and of the interwar globalization backlash
The 1047297rst is that the 1920s and 1930s were rich in technological innovations
A number of inventions produced by the pre-1913 ldquosecond industrial revolu-
tionrdquo had a measurable impact on aggregate output only during or after the
war This was the case for instance with regard to the internal combustion
engine the assembly line pioneered by Henry Ford and the electrical network
Table 14 Average European unemployment rates 1921ndash1993 (percent)
1921ndash1929 1930ndash1938 1950ndash1959 1960ndash1973 1974ndash1981 1982ndash1989 1990ndash1993
83 158 42 25 52 88 92
Note Arithmetic average of average annual unemployment rates 1921ndash1938 covers France Germany and the
United Kingdom for 1950ndash1993 Italy is also included
Sources For 1921ndash1938 Galenson and Zellner (1957) 455 For 1950ndash1993 Maddison (1991) 262 and OECD
data from Crafts and Toniolo (1996) 7
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983124 I 983109 983145 983123u 983120p983145v 15
and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
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983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
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983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
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983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
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The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
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983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
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983124 983127 983109 983127 9831278
particularly in Asia The progress of Latin America was less buoyant patchierand more prone to reversals of fortune Sub-Saharan Africa with the excep-
tion of the Cape region remained almost entirely cut off from the spread of
modern economic growth Even in many industrial countries workers still had
not derived much bene1047297t from this process before World War I
Table 11 puts the years between the two World Wars in the context of
long-term modern economic growth For a period of almost 130 years from
1870 to the end of the twentieth century the worldrsquos annual rate of increase in
the real GDP per capitamdasha rough proxy for the standard of livingmdashaveragedabout 15 percent per annum
Even a quick glance at table 11 will reveal two features of the long-term
growth of the world economy the uneven path of growth both across regions
and over time Economists do indeed expect productivity (proxied by GDP per
capita) growth to differ across countries and regions but their assumption is
that backward areas will catch up with the more advanced ones The history of
modern economic growth tends to show that if anything the opposite has been
the case for a long period of time In 1870 western Europe and the westernoffshoots were already more ldquoadvancedrdquo in terms of GDP per capita than the
worldrsquos average (about 2200 international dollars vs 867)1 yet their secular
growth rates have been higher than those of the initially poorer countries
1 At 1990 purchasing power
Table 11 Average annual rates of growth 1870ndash1998 world and main regions
1870ndash1998 1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1998
World 148 130 091 293 133
Western
Europea
174 132 076 408 178
Western
offshootsb
187 181 155 244 194
Japan 263 148 089 805 234
Asia (excluding
Japan)
133 038 ndash002 292 354
Latin America 141 181 142 252 099
Eastern
Europec
122 115 150 349 ndash110
Africa 088 064 102 207 001
Note Estimates are weighted averagesa Twenty-nine western European countriesb Australia New Zealand Canada and the United Statesc Seven eastern European countries and Russiathe Soviet Union
Source Maddison (2001) 126 and passim
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983124 I 983109 983145 983123u 983120p983145v 9
Divergence rather than convergence towards the productivity leaders has
tended to characterize the long-run growth process of the world economy at
least until the 1980s The big exception the rapid catcher-up has been Japan
Rates of growth also differed over time beyond the normal cyclical1047298uc-tuations suggesting that in each given period in table 11 factors such as
technology institutions and economic policies affected the world economy in
different ways
As shown in table 11 during the 1047297rst (1870ndash1913) and the last (1973ndash1998)
periods real per capita GDP in western Europe and the western offshoots grew
at about the average secular rate In contrast the two other subperiods deviate
sharply from this trend In the 1950s and 1960s the economies of western
Europe grew at a rate twice as high as the secular trend This tremendousincrease in production and the full employment that accompanied it turned
out to be compatible with low in1047298ation and overall external stability at least
until the mid-1960s The western offshoots also outperformed secular average
growth if in a less spectacular fashion
While the rapid growth from 1950 to 1973 looks like a golden age of economic
growth the preceding period from 1913 to 1950 appears to be a pause in the
onward progress of rising per capita income Almost every area distinguished
in table 11 grew more slowly in 1913ndash1950 than in the preceding period andfar more slowly than in the golden age The slowdown was particularly sharp in
western Europe which will occupy a prominent place in this narrative
This brief survey of the aggregate changes in the world economy since 1870
was intended to put the interwar years the subject of this volume in a longer-
term perspective that should help us to better understand the speci1047297c features
of those momentous de1047297ning years We now turn to a brief exposition of the
main macroeconomic aspects of the interwar period by way of introduction to
the speci1047297
c issues dealt with in the following chapters
12 Some Quantitative Features of theInterwar Years
The marked slowdown in the worldrsquos real per capita growth between 1913 and
1950 provides the background to the present history Against this general back-
ground and before proceeding to analyze the various aspects of the international
economy during the interwar years it is useful to discuss brie1047298y a few ldquostyl-
ized factsrdquo that are prominent features of the aggregate quantitative changes
between 1913 and 1950 (or between 1921 and 1938 as may be the case) They
may be summarized as follows (1) while the slowdown in economic activity
was a worldwide phenomenon it affected individual areas in quite different
ways (2) the overall slowdown was the result of quite satisfactory rates in the
1920s and of dismal economic performance in the 1930s (3) far from keeping
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983124 983127 983109 983127 98312710
pace with output trends international trade declined in real terms (4) high and
structural unemployment was the shocking new phenomenon of those years
and (5) labor productivity increased more rapidly than in 1890ndash1913 the pace
achieved in the 1920s was particularly good
Slower Growth
Table 12 shows that the reduction in the growth of real per capita GDP
between 1870 and 1913 and between 1913 and 1950 characterized all the
regions in the table except for the Soviet Union which was the most notable
exception to the general gloom of the 1930s (see table 12)
There is one dominant explanation for the severity of the European slow-
down between 1913 and 1950 (and paradoxically also for the golden age of
the 1950s and 1960s) war The catastrophic impact of two global military con-
1047298icts both fought with unprecedented destructive strength on European soil
explains the poor performance of western Europe relative to North America
its main competitor and trading partner During 1913ndash1921 western Europersquos
output declined on average by 12 percent per annum while GDP per capita in
the United States remained roughly constant During 1938ndash1950 the United
States enjoyed its fastest growth on record for a period of comparable length
38 percent per annum while Western Europe only grew by 03 percent per
annum This is why in what follows special emphasis will be placed on the
immediate and long-term effects of the Great War (including among the latter
the second global con1047298agration of 1939ndash1945) On the other hand in 1921ndash
1938 Europersquos growth considerably exceeded that of the United States Japanrsquos
record (1913ndash1950) was also deeply affected by the Second World War
Growth deceleration in Latin America was roughly in line with that of the
western offshoots in North America and Oceania Most of Asia (excluding
Japan) which had remained quite untouched by the growth acceleration pro-
cess of the ldquo1047297rst globalizationrdquo (1870ndash1913) experienced a long-term decline
in output and welfare during the period covered by this book
Table 12 Growth of real GDP per capita in Europe the United States Latin
America Japan China India and the Soviet Union 1913ndash1950 (average
annual rates of growth)
Western
Europe
United
States
Latin
America
Japan China India Soviet
Union
1913ndash50 08 18 14 09 ndash08 ndash03 11
1921ndash38 20 08 14 18 na ndash01 na
1921ndash29 35 33 26 20 na 09 na
1929ndash38 07 ndash13 04 17 0 ndash10 49
Source Maddison (2001) 104ndash11 180ndash87
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983124 I 983109 983145 983123u 983120p983145v 11
As already mentioned the Soviet Union in the 1930s provided a striking
contrast to the dismal performance of most of the market economies Even
allowing for recent revisions of earlier Soviet and western estimates total GDP
growth in the Soviet Union averaged 530 percent per annum between 1928and 1940 (Allen 2003 217) in striking contrast to the dim performance of
the worldrsquos other main areas Given the record of the Soviet Unionrsquos planned
economy it is no wonder that the Third International could tout the Soviet
Unionrsquos performance as the ldquoproofrdquo of the superiority of the socialist system
nor is it surprising that many in the West prophesied the end of capitalism
including Mussolini and Hitler who preached and practiced their own sup-
posed ldquothird wayrdquo between the two systems Needless to say the subsequent
development of the world economy proved the resilience of well-run marketeconomies
The whole period stands out as one of major divisions and lack of coopera-
tion with devastating results for the pace of economic progress This is shown
among other things by the above-average performance in 1913ndash1950 of coun-
tries that remained consistently neutral such as Sweden and Switzerland
The ldquoGlobalization Backlashrdquo
It has become common for scholars to refer to the second of the quantitative
ldquostylized factsrdquo outlined abovemdashnamely the disruption of international trade
and the sharp reduction in the cross-border movements of factors of produc-
tion (capital and labor)mdashas ldquoglobalization backlashrdquo
International movements of goods services capital and labor typically
depend on two sets of factors technology which reduces transport and com-
munication costs and institutions both domestic and international that may
either favor or hinder international economic integration Transport and com-
munication technology continued to improve in the period under consider-
ation not least due to military research and developments stimulated by the
First World War Larger and more energy-ef 1047297cient ships reduced the unit cost
of sea transport Developments in the internal combustion engine provided
a competitive alternative to railways in land transport for both people and
goods A passenger airline industry took off providing ever-safer and pro-
gressively cheaper services Telephone and radio revolutionized international
communication having a particularly strong impact on 1047297nancial market inte-
gration All other things being equal therefore technology created increas-
ingly favorable conditions for cross-border economic integration Therefore
we must seek other reasons to explain why August 1914 put an end to a long
era of progressive if slow integration of the world economy an era that then
came to be known as the ldquobelle eacutepoquerdquo and that we now call ldquo1047297rst globaliza-
tionrdquo As mentioned above continuous tension misunderstandings and lack
of cooperation characterized international relations in 1919ndash1938 resulting
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983124 983127 983109 983127 98312712
in the creation of an institutional environment inimical to trade and to the
cross-border movement of peoplemdashand in the 1930s of capital as well On
the domestic front countries were busy erecting tariff and nontariff walls
limiting immigration and minutely regulating international1047297
nancial transac-tions The international monetary system painfully re-created in the 1920s
collapsed early in the next decade International economic organizations
such as the economic commission of the League of Nations and the Bank for
International Settlements were almost powerless in a context of extremely
strained international relations On balance man-made obstacles outweighed
the favorable impact of technology on international economic transactions
Pre-1913 globalization was put in reverse
In 1870ndash1913 the income elasticity of world exports was certainly greaterthan 1 and probably close to 2 In the subsequent sixteen years international
trade growth slowed down everywhere in 1929ndash1950 it almost stagnated (see
table 13) Europersquos trade performance stands out as particularly disappoint-
ing Japanrsquos exports grew rapidly in the 1920s while they decreased in the
1930s in spite of a fairly good output growth marking the shift to autarky
imposed by the military regime The export performance of the United States
was twice as good as the worldrsquos average in the 1920s While US export
performance sharply decreased in the subsequent decade it still remained wellabove average
Europe was largely responsible for the dramatic fall in international trade
growth during the Great War and the interwar years In the 1930s the volume
of western European exports actually declined Europersquos sluggish trade impact
on the Atlantic routes both North and South depressed trade from and to the
Americas as well
Table 13 Growth of value of merchandise exports at constant prices for twenty-four countries (annual average rates)
1870ndash1913 1913ndash1929 1929ndash1950 1950ndash1973 1973ndash1998
Western
Europea
323 021 ndash032 803 455
United States 486 333 168 627 598
RussiaSoviet
Union
na ndash466 308 998 295
Latin Americab 340 389 146 410 570China 259 290 006 274 1181
India 237 ndash102 ndash190 246 594
Japan 847 700 ndash097 1554 530
World 335 089 788 507
a Twelve countriesb Seven countries
Source Maddison (2001) 361ndash62
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983124 I 983109 983145 983123u 983120p983145v 13
As the result of the interwar trade trends western Europersquos share of world
exports declined from 601 percent in 1913 to 411 percent in 1950 highlight-
ing one of the structural changes in the world economy brought about by
two world wars and the Great Depression the shift of the center of the worldeconomy away from western Europe
As a feature of the interwar globalization backlash migration 1047298ows
stand out even more strikingly than trade In the century after 1820 about
55 million Europeans left the continent In the twentieth century war and
the United States Immigration Acts which introduced immigrant quotas by
national origin put an end to the ldquoage of mass migrationrdquo which was a
salient aspect of the 1047297rst globalization The depression of the 1930s with
the attendant mass unemployment in the New World further depressed the1047298ow of people crossing the Atlantic Intra-European migrations were also
somewhat reduced
If voluntary migration sharply decreased forced migration increased
highlighting the most tragic features of the European interwar history
Persecution made Jews leave central Europe in the 1930s Spaniards left for
Mexico during the Spanish Civil War Poles and Baltic people were forcibly
deported to Siberia
Cross-border capital1047298
ows reached an all-time peak in 1913 They becamea casualty of the Great War and remained depressed in the following two
decades characterized as they were by administrative controls on cross-border
monetary transactions (the so-called ldquoexchange controlsrdquo) and by uncertainty
regarding future exchange rates
The Rise in Unemployment between the Wars
High unemployment rates particularly but not exclusively in the 1930s stand
out in collective memories as the most deeply felt economic feature of the
interwar period Visual artists and writers as well as a largely diffused oral
tradition have passed on stories of homeless people long queues for a free
meal workers sitting idle outside their humble dwellings helpless families
discouraged long-term unemployed people Photographs paintings and novels
describe the Great Depression in North America and Europe in quite similar
fashions meaning that as far as unemployment is concerned in the 1930s the
contrast between the two sides of the Atlantic was not perceived to be very
pronounced On the contrary a contrast existed in the 1920s when in many
European countries a fairly large number of people were out of work while
the United States experienced almost full employment
Comparing unemployment over time and across countries is a daunting task
The term ldquounemploymentrdquo appeared for the 1047297rst time only in 1888 (Royal
Institute of International Affairs 1935 26) the compilation of of 1047297cial sta-
tistics began much later Moreover because such statistics often derived from
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983124 983127 983109 983127 98312714
the records either of those receiving some sort of bene1047297t or of those register-
ing with labor-exchange of 1047297ces they depend heavily on speci1047297c institutional
arrangements in individual countries It is thus impossible to make an accuratecomparison of the levels of interwar unemployment with those prevailing in
the quarter of a century before 1914 However there seems to be some con-
sensus among scholars that unemployment before the First World War was of
shorter average duration than that experienced after 1918
More can be said about the relative magnitude of the phenomenon in the
interwar period and the years after the Second World War Table 14 covers
only a few western European countries and may not be very precise as far as the
absolute levels of unemployment rates are concerned but it probably providesa broadly correct indication of relative variations across time (Eichengreen and
Hatton 1988 7) Exceptionally high unemployment rates stand out as a fea-
ture of the 1930s while unemployment in the 1960s was exceptionally low At
the same time the relative number of those out of work in the troubled decade
of the 1920s looks on average to be broadly comparable with that of the 1980s
and early 1990s an aspect we shall return to in the concluding chapter
Productivity Continues to Improve
While the number of unemployed rose available evidence shows that product
per hour worked by those who retained their jobs continued to increase From
1913 to 1950 the pace of productivity growth in western Europe was roughly
the same as in the previous half century In the United States productivity
growth was more rapid than in the pre-1914 decades Productivity growth in
Japan on the other hand slowed down (see table 15)
There are three plausible reasons why productivity continued to grow in the
period under review in spite of the disruption of human and physical capital
brought about by two world wars and of the interwar globalization backlash
The 1047297rst is that the 1920s and 1930s were rich in technological innovations
A number of inventions produced by the pre-1913 ldquosecond industrial revolu-
tionrdquo had a measurable impact on aggregate output only during or after the
war This was the case for instance with regard to the internal combustion
engine the assembly line pioneered by Henry Ford and the electrical network
Table 14 Average European unemployment rates 1921ndash1993 (percent)
1921ndash1929 1930ndash1938 1950ndash1959 1960ndash1973 1974ndash1981 1982ndash1989 1990ndash1993
83 158 42 25 52 88 92
Note Arithmetic average of average annual unemployment rates 1921ndash1938 covers France Germany and the
United Kingdom for 1950ndash1993 Italy is also included
Sources For 1921ndash1938 Galenson and Zellner (1957) 455 For 1950ndash1993 Maddison (1991) 262 and OECD
data from Crafts and Toniolo (1996) 7
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983124 I 983109 983145 983123u 983120p983145v 15
and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
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983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
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983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
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983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
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The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
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large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
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983124 I 983109 983145 983123u 983120p983145v 9
Divergence rather than convergence towards the productivity leaders has
tended to characterize the long-run growth process of the world economy at
least until the 1980s The big exception the rapid catcher-up has been Japan
Rates of growth also differed over time beyond the normal cyclical1047298uc-tuations suggesting that in each given period in table 11 factors such as
technology institutions and economic policies affected the world economy in
different ways
As shown in table 11 during the 1047297rst (1870ndash1913) and the last (1973ndash1998)
periods real per capita GDP in western Europe and the western offshoots grew
at about the average secular rate In contrast the two other subperiods deviate
sharply from this trend In the 1950s and 1960s the economies of western
Europe grew at a rate twice as high as the secular trend This tremendousincrease in production and the full employment that accompanied it turned
out to be compatible with low in1047298ation and overall external stability at least
until the mid-1960s The western offshoots also outperformed secular average
growth if in a less spectacular fashion
While the rapid growth from 1950 to 1973 looks like a golden age of economic
growth the preceding period from 1913 to 1950 appears to be a pause in the
onward progress of rising per capita income Almost every area distinguished
in table 11 grew more slowly in 1913ndash1950 than in the preceding period andfar more slowly than in the golden age The slowdown was particularly sharp in
western Europe which will occupy a prominent place in this narrative
This brief survey of the aggregate changes in the world economy since 1870
was intended to put the interwar years the subject of this volume in a longer-
term perspective that should help us to better understand the speci1047297c features
of those momentous de1047297ning years We now turn to a brief exposition of the
main macroeconomic aspects of the interwar period by way of introduction to
the speci1047297
c issues dealt with in the following chapters
12 Some Quantitative Features of theInterwar Years
The marked slowdown in the worldrsquos real per capita growth between 1913 and
1950 provides the background to the present history Against this general back-
ground and before proceeding to analyze the various aspects of the international
economy during the interwar years it is useful to discuss brie1047298y a few ldquostyl-
ized factsrdquo that are prominent features of the aggregate quantitative changes
between 1913 and 1950 (or between 1921 and 1938 as may be the case) They
may be summarized as follows (1) while the slowdown in economic activity
was a worldwide phenomenon it affected individual areas in quite different
ways (2) the overall slowdown was the result of quite satisfactory rates in the
1920s and of dismal economic performance in the 1930s (3) far from keeping
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983124 983127 983109 983127 98312710
pace with output trends international trade declined in real terms (4) high and
structural unemployment was the shocking new phenomenon of those years
and (5) labor productivity increased more rapidly than in 1890ndash1913 the pace
achieved in the 1920s was particularly good
Slower Growth
Table 12 shows that the reduction in the growth of real per capita GDP
between 1870 and 1913 and between 1913 and 1950 characterized all the
regions in the table except for the Soviet Union which was the most notable
exception to the general gloom of the 1930s (see table 12)
There is one dominant explanation for the severity of the European slow-
down between 1913 and 1950 (and paradoxically also for the golden age of
the 1950s and 1960s) war The catastrophic impact of two global military con-
1047298icts both fought with unprecedented destructive strength on European soil
explains the poor performance of western Europe relative to North America
its main competitor and trading partner During 1913ndash1921 western Europersquos
output declined on average by 12 percent per annum while GDP per capita in
the United States remained roughly constant During 1938ndash1950 the United
States enjoyed its fastest growth on record for a period of comparable length
38 percent per annum while Western Europe only grew by 03 percent per
annum This is why in what follows special emphasis will be placed on the
immediate and long-term effects of the Great War (including among the latter
the second global con1047298agration of 1939ndash1945) On the other hand in 1921ndash
1938 Europersquos growth considerably exceeded that of the United States Japanrsquos
record (1913ndash1950) was also deeply affected by the Second World War
Growth deceleration in Latin America was roughly in line with that of the
western offshoots in North America and Oceania Most of Asia (excluding
Japan) which had remained quite untouched by the growth acceleration pro-
cess of the ldquo1047297rst globalizationrdquo (1870ndash1913) experienced a long-term decline
in output and welfare during the period covered by this book
Table 12 Growth of real GDP per capita in Europe the United States Latin
America Japan China India and the Soviet Union 1913ndash1950 (average
annual rates of growth)
Western
Europe
United
States
Latin
America
Japan China India Soviet
Union
1913ndash50 08 18 14 09 ndash08 ndash03 11
1921ndash38 20 08 14 18 na ndash01 na
1921ndash29 35 33 26 20 na 09 na
1929ndash38 07 ndash13 04 17 0 ndash10 49
Source Maddison (2001) 104ndash11 180ndash87
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983124 I 983109 983145 983123u 983120p983145v 11
As already mentioned the Soviet Union in the 1930s provided a striking
contrast to the dismal performance of most of the market economies Even
allowing for recent revisions of earlier Soviet and western estimates total GDP
growth in the Soviet Union averaged 530 percent per annum between 1928and 1940 (Allen 2003 217) in striking contrast to the dim performance of
the worldrsquos other main areas Given the record of the Soviet Unionrsquos planned
economy it is no wonder that the Third International could tout the Soviet
Unionrsquos performance as the ldquoproofrdquo of the superiority of the socialist system
nor is it surprising that many in the West prophesied the end of capitalism
including Mussolini and Hitler who preached and practiced their own sup-
posed ldquothird wayrdquo between the two systems Needless to say the subsequent
development of the world economy proved the resilience of well-run marketeconomies
The whole period stands out as one of major divisions and lack of coopera-
tion with devastating results for the pace of economic progress This is shown
among other things by the above-average performance in 1913ndash1950 of coun-
tries that remained consistently neutral such as Sweden and Switzerland
The ldquoGlobalization Backlashrdquo
It has become common for scholars to refer to the second of the quantitative
ldquostylized factsrdquo outlined abovemdashnamely the disruption of international trade
and the sharp reduction in the cross-border movements of factors of produc-
tion (capital and labor)mdashas ldquoglobalization backlashrdquo
International movements of goods services capital and labor typically
depend on two sets of factors technology which reduces transport and com-
munication costs and institutions both domestic and international that may
either favor or hinder international economic integration Transport and com-
munication technology continued to improve in the period under consider-
ation not least due to military research and developments stimulated by the
First World War Larger and more energy-ef 1047297cient ships reduced the unit cost
of sea transport Developments in the internal combustion engine provided
a competitive alternative to railways in land transport for both people and
goods A passenger airline industry took off providing ever-safer and pro-
gressively cheaper services Telephone and radio revolutionized international
communication having a particularly strong impact on 1047297nancial market inte-
gration All other things being equal therefore technology created increas-
ingly favorable conditions for cross-border economic integration Therefore
we must seek other reasons to explain why August 1914 put an end to a long
era of progressive if slow integration of the world economy an era that then
came to be known as the ldquobelle eacutepoquerdquo and that we now call ldquo1047297rst globaliza-
tionrdquo As mentioned above continuous tension misunderstandings and lack
of cooperation characterized international relations in 1919ndash1938 resulting
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in the creation of an institutional environment inimical to trade and to the
cross-border movement of peoplemdashand in the 1930s of capital as well On
the domestic front countries were busy erecting tariff and nontariff walls
limiting immigration and minutely regulating international1047297
nancial transac-tions The international monetary system painfully re-created in the 1920s
collapsed early in the next decade International economic organizations
such as the economic commission of the League of Nations and the Bank for
International Settlements were almost powerless in a context of extremely
strained international relations On balance man-made obstacles outweighed
the favorable impact of technology on international economic transactions
Pre-1913 globalization was put in reverse
In 1870ndash1913 the income elasticity of world exports was certainly greaterthan 1 and probably close to 2 In the subsequent sixteen years international
trade growth slowed down everywhere in 1929ndash1950 it almost stagnated (see
table 13) Europersquos trade performance stands out as particularly disappoint-
ing Japanrsquos exports grew rapidly in the 1920s while they decreased in the
1930s in spite of a fairly good output growth marking the shift to autarky
imposed by the military regime The export performance of the United States
was twice as good as the worldrsquos average in the 1920s While US export
performance sharply decreased in the subsequent decade it still remained wellabove average
Europe was largely responsible for the dramatic fall in international trade
growth during the Great War and the interwar years In the 1930s the volume
of western European exports actually declined Europersquos sluggish trade impact
on the Atlantic routes both North and South depressed trade from and to the
Americas as well
Table 13 Growth of value of merchandise exports at constant prices for twenty-four countries (annual average rates)
1870ndash1913 1913ndash1929 1929ndash1950 1950ndash1973 1973ndash1998
Western
Europea
323 021 ndash032 803 455
United States 486 333 168 627 598
RussiaSoviet
Union
na ndash466 308 998 295
Latin Americab 340 389 146 410 570China 259 290 006 274 1181
India 237 ndash102 ndash190 246 594
Japan 847 700 ndash097 1554 530
World 335 089 788 507
a Twelve countriesb Seven countries
Source Maddison (2001) 361ndash62
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As the result of the interwar trade trends western Europersquos share of world
exports declined from 601 percent in 1913 to 411 percent in 1950 highlight-
ing one of the structural changes in the world economy brought about by
two world wars and the Great Depression the shift of the center of the worldeconomy away from western Europe
As a feature of the interwar globalization backlash migration 1047298ows
stand out even more strikingly than trade In the century after 1820 about
55 million Europeans left the continent In the twentieth century war and
the United States Immigration Acts which introduced immigrant quotas by
national origin put an end to the ldquoage of mass migrationrdquo which was a
salient aspect of the 1047297rst globalization The depression of the 1930s with
the attendant mass unemployment in the New World further depressed the1047298ow of people crossing the Atlantic Intra-European migrations were also
somewhat reduced
If voluntary migration sharply decreased forced migration increased
highlighting the most tragic features of the European interwar history
Persecution made Jews leave central Europe in the 1930s Spaniards left for
Mexico during the Spanish Civil War Poles and Baltic people were forcibly
deported to Siberia
Cross-border capital1047298
ows reached an all-time peak in 1913 They becamea casualty of the Great War and remained depressed in the following two
decades characterized as they were by administrative controls on cross-border
monetary transactions (the so-called ldquoexchange controlsrdquo) and by uncertainty
regarding future exchange rates
The Rise in Unemployment between the Wars
High unemployment rates particularly but not exclusively in the 1930s stand
out in collective memories as the most deeply felt economic feature of the
interwar period Visual artists and writers as well as a largely diffused oral
tradition have passed on stories of homeless people long queues for a free
meal workers sitting idle outside their humble dwellings helpless families
discouraged long-term unemployed people Photographs paintings and novels
describe the Great Depression in North America and Europe in quite similar
fashions meaning that as far as unemployment is concerned in the 1930s the
contrast between the two sides of the Atlantic was not perceived to be very
pronounced On the contrary a contrast existed in the 1920s when in many
European countries a fairly large number of people were out of work while
the United States experienced almost full employment
Comparing unemployment over time and across countries is a daunting task
The term ldquounemploymentrdquo appeared for the 1047297rst time only in 1888 (Royal
Institute of International Affairs 1935 26) the compilation of of 1047297cial sta-
tistics began much later Moreover because such statistics often derived from
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983124 983127 983109 983127 98312714
the records either of those receiving some sort of bene1047297t or of those register-
ing with labor-exchange of 1047297ces they depend heavily on speci1047297c institutional
arrangements in individual countries It is thus impossible to make an accuratecomparison of the levels of interwar unemployment with those prevailing in
the quarter of a century before 1914 However there seems to be some con-
sensus among scholars that unemployment before the First World War was of
shorter average duration than that experienced after 1918
More can be said about the relative magnitude of the phenomenon in the
interwar period and the years after the Second World War Table 14 covers
only a few western European countries and may not be very precise as far as the
absolute levels of unemployment rates are concerned but it probably providesa broadly correct indication of relative variations across time (Eichengreen and
Hatton 1988 7) Exceptionally high unemployment rates stand out as a fea-
ture of the 1930s while unemployment in the 1960s was exceptionally low At
the same time the relative number of those out of work in the troubled decade
of the 1920s looks on average to be broadly comparable with that of the 1980s
and early 1990s an aspect we shall return to in the concluding chapter
Productivity Continues to Improve
While the number of unemployed rose available evidence shows that product
per hour worked by those who retained their jobs continued to increase From
1913 to 1950 the pace of productivity growth in western Europe was roughly
the same as in the previous half century In the United States productivity
growth was more rapid than in the pre-1914 decades Productivity growth in
Japan on the other hand slowed down (see table 15)
There are three plausible reasons why productivity continued to grow in the
period under review in spite of the disruption of human and physical capital
brought about by two world wars and of the interwar globalization backlash
The 1047297rst is that the 1920s and 1930s were rich in technological innovations
A number of inventions produced by the pre-1913 ldquosecond industrial revolu-
tionrdquo had a measurable impact on aggregate output only during or after the
war This was the case for instance with regard to the internal combustion
engine the assembly line pioneered by Henry Ford and the electrical network
Table 14 Average European unemployment rates 1921ndash1993 (percent)
1921ndash1929 1930ndash1938 1950ndash1959 1960ndash1973 1974ndash1981 1982ndash1989 1990ndash1993
83 158 42 25 52 88 92
Note Arithmetic average of average annual unemployment rates 1921ndash1938 covers France Germany and the
United Kingdom for 1950ndash1993 Italy is also included
Sources For 1921ndash1938 Galenson and Zellner (1957) 455 For 1950ndash1993 Maddison (1991) 262 and OECD
data from Crafts and Toniolo (1996) 7
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983124 I 983109 983145 983123u 983120p983145v 15
and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
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983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
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983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
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983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
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The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
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983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
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983124 983127 983109 983127 98312710
pace with output trends international trade declined in real terms (4) high and
structural unemployment was the shocking new phenomenon of those years
and (5) labor productivity increased more rapidly than in 1890ndash1913 the pace
achieved in the 1920s was particularly good
Slower Growth
Table 12 shows that the reduction in the growth of real per capita GDP
between 1870 and 1913 and between 1913 and 1950 characterized all the
regions in the table except for the Soviet Union which was the most notable
exception to the general gloom of the 1930s (see table 12)
There is one dominant explanation for the severity of the European slow-
down between 1913 and 1950 (and paradoxically also for the golden age of
the 1950s and 1960s) war The catastrophic impact of two global military con-
1047298icts both fought with unprecedented destructive strength on European soil
explains the poor performance of western Europe relative to North America
its main competitor and trading partner During 1913ndash1921 western Europersquos
output declined on average by 12 percent per annum while GDP per capita in
the United States remained roughly constant During 1938ndash1950 the United
States enjoyed its fastest growth on record for a period of comparable length
38 percent per annum while Western Europe only grew by 03 percent per
annum This is why in what follows special emphasis will be placed on the
immediate and long-term effects of the Great War (including among the latter
the second global con1047298agration of 1939ndash1945) On the other hand in 1921ndash
1938 Europersquos growth considerably exceeded that of the United States Japanrsquos
record (1913ndash1950) was also deeply affected by the Second World War
Growth deceleration in Latin America was roughly in line with that of the
western offshoots in North America and Oceania Most of Asia (excluding
Japan) which had remained quite untouched by the growth acceleration pro-
cess of the ldquo1047297rst globalizationrdquo (1870ndash1913) experienced a long-term decline
in output and welfare during the period covered by this book
Table 12 Growth of real GDP per capita in Europe the United States Latin
America Japan China India and the Soviet Union 1913ndash1950 (average
annual rates of growth)
Western
Europe
United
States
Latin
America
Japan China India Soviet
Union
1913ndash50 08 18 14 09 ndash08 ndash03 11
1921ndash38 20 08 14 18 na ndash01 na
1921ndash29 35 33 26 20 na 09 na
1929ndash38 07 ndash13 04 17 0 ndash10 49
Source Maddison (2001) 104ndash11 180ndash87
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983124 I 983109 983145 983123u 983120p983145v 11
As already mentioned the Soviet Union in the 1930s provided a striking
contrast to the dismal performance of most of the market economies Even
allowing for recent revisions of earlier Soviet and western estimates total GDP
growth in the Soviet Union averaged 530 percent per annum between 1928and 1940 (Allen 2003 217) in striking contrast to the dim performance of
the worldrsquos other main areas Given the record of the Soviet Unionrsquos planned
economy it is no wonder that the Third International could tout the Soviet
Unionrsquos performance as the ldquoproofrdquo of the superiority of the socialist system
nor is it surprising that many in the West prophesied the end of capitalism
including Mussolini and Hitler who preached and practiced their own sup-
posed ldquothird wayrdquo between the two systems Needless to say the subsequent
development of the world economy proved the resilience of well-run marketeconomies
The whole period stands out as one of major divisions and lack of coopera-
tion with devastating results for the pace of economic progress This is shown
among other things by the above-average performance in 1913ndash1950 of coun-
tries that remained consistently neutral such as Sweden and Switzerland
The ldquoGlobalization Backlashrdquo
It has become common for scholars to refer to the second of the quantitative
ldquostylized factsrdquo outlined abovemdashnamely the disruption of international trade
and the sharp reduction in the cross-border movements of factors of produc-
tion (capital and labor)mdashas ldquoglobalization backlashrdquo
International movements of goods services capital and labor typically
depend on two sets of factors technology which reduces transport and com-
munication costs and institutions both domestic and international that may
either favor or hinder international economic integration Transport and com-
munication technology continued to improve in the period under consider-
ation not least due to military research and developments stimulated by the
First World War Larger and more energy-ef 1047297cient ships reduced the unit cost
of sea transport Developments in the internal combustion engine provided
a competitive alternative to railways in land transport for both people and
goods A passenger airline industry took off providing ever-safer and pro-
gressively cheaper services Telephone and radio revolutionized international
communication having a particularly strong impact on 1047297nancial market inte-
gration All other things being equal therefore technology created increas-
ingly favorable conditions for cross-border economic integration Therefore
we must seek other reasons to explain why August 1914 put an end to a long
era of progressive if slow integration of the world economy an era that then
came to be known as the ldquobelle eacutepoquerdquo and that we now call ldquo1047297rst globaliza-
tionrdquo As mentioned above continuous tension misunderstandings and lack
of cooperation characterized international relations in 1919ndash1938 resulting
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in the creation of an institutional environment inimical to trade and to the
cross-border movement of peoplemdashand in the 1930s of capital as well On
the domestic front countries were busy erecting tariff and nontariff walls
limiting immigration and minutely regulating international1047297
nancial transac-tions The international monetary system painfully re-created in the 1920s
collapsed early in the next decade International economic organizations
such as the economic commission of the League of Nations and the Bank for
International Settlements were almost powerless in a context of extremely
strained international relations On balance man-made obstacles outweighed
the favorable impact of technology on international economic transactions
Pre-1913 globalization was put in reverse
In 1870ndash1913 the income elasticity of world exports was certainly greaterthan 1 and probably close to 2 In the subsequent sixteen years international
trade growth slowed down everywhere in 1929ndash1950 it almost stagnated (see
table 13) Europersquos trade performance stands out as particularly disappoint-
ing Japanrsquos exports grew rapidly in the 1920s while they decreased in the
1930s in spite of a fairly good output growth marking the shift to autarky
imposed by the military regime The export performance of the United States
was twice as good as the worldrsquos average in the 1920s While US export
performance sharply decreased in the subsequent decade it still remained wellabove average
Europe was largely responsible for the dramatic fall in international trade
growth during the Great War and the interwar years In the 1930s the volume
of western European exports actually declined Europersquos sluggish trade impact
on the Atlantic routes both North and South depressed trade from and to the
Americas as well
Table 13 Growth of value of merchandise exports at constant prices for twenty-four countries (annual average rates)
1870ndash1913 1913ndash1929 1929ndash1950 1950ndash1973 1973ndash1998
Western
Europea
323 021 ndash032 803 455
United States 486 333 168 627 598
RussiaSoviet
Union
na ndash466 308 998 295
Latin Americab 340 389 146 410 570China 259 290 006 274 1181
India 237 ndash102 ndash190 246 594
Japan 847 700 ndash097 1554 530
World 335 089 788 507
a Twelve countriesb Seven countries
Source Maddison (2001) 361ndash62
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As the result of the interwar trade trends western Europersquos share of world
exports declined from 601 percent in 1913 to 411 percent in 1950 highlight-
ing one of the structural changes in the world economy brought about by
two world wars and the Great Depression the shift of the center of the worldeconomy away from western Europe
As a feature of the interwar globalization backlash migration 1047298ows
stand out even more strikingly than trade In the century after 1820 about
55 million Europeans left the continent In the twentieth century war and
the United States Immigration Acts which introduced immigrant quotas by
national origin put an end to the ldquoage of mass migrationrdquo which was a
salient aspect of the 1047297rst globalization The depression of the 1930s with
the attendant mass unemployment in the New World further depressed the1047298ow of people crossing the Atlantic Intra-European migrations were also
somewhat reduced
If voluntary migration sharply decreased forced migration increased
highlighting the most tragic features of the European interwar history
Persecution made Jews leave central Europe in the 1930s Spaniards left for
Mexico during the Spanish Civil War Poles and Baltic people were forcibly
deported to Siberia
Cross-border capital1047298
ows reached an all-time peak in 1913 They becamea casualty of the Great War and remained depressed in the following two
decades characterized as they were by administrative controls on cross-border
monetary transactions (the so-called ldquoexchange controlsrdquo) and by uncertainty
regarding future exchange rates
The Rise in Unemployment between the Wars
High unemployment rates particularly but not exclusively in the 1930s stand
out in collective memories as the most deeply felt economic feature of the
interwar period Visual artists and writers as well as a largely diffused oral
tradition have passed on stories of homeless people long queues for a free
meal workers sitting idle outside their humble dwellings helpless families
discouraged long-term unemployed people Photographs paintings and novels
describe the Great Depression in North America and Europe in quite similar
fashions meaning that as far as unemployment is concerned in the 1930s the
contrast between the two sides of the Atlantic was not perceived to be very
pronounced On the contrary a contrast existed in the 1920s when in many
European countries a fairly large number of people were out of work while
the United States experienced almost full employment
Comparing unemployment over time and across countries is a daunting task
The term ldquounemploymentrdquo appeared for the 1047297rst time only in 1888 (Royal
Institute of International Affairs 1935 26) the compilation of of 1047297cial sta-
tistics began much later Moreover because such statistics often derived from
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983124 983127 983109 983127 98312714
the records either of those receiving some sort of bene1047297t or of those register-
ing with labor-exchange of 1047297ces they depend heavily on speci1047297c institutional
arrangements in individual countries It is thus impossible to make an accuratecomparison of the levels of interwar unemployment with those prevailing in
the quarter of a century before 1914 However there seems to be some con-
sensus among scholars that unemployment before the First World War was of
shorter average duration than that experienced after 1918
More can be said about the relative magnitude of the phenomenon in the
interwar period and the years after the Second World War Table 14 covers
only a few western European countries and may not be very precise as far as the
absolute levels of unemployment rates are concerned but it probably providesa broadly correct indication of relative variations across time (Eichengreen and
Hatton 1988 7) Exceptionally high unemployment rates stand out as a fea-
ture of the 1930s while unemployment in the 1960s was exceptionally low At
the same time the relative number of those out of work in the troubled decade
of the 1920s looks on average to be broadly comparable with that of the 1980s
and early 1990s an aspect we shall return to in the concluding chapter
Productivity Continues to Improve
While the number of unemployed rose available evidence shows that product
per hour worked by those who retained their jobs continued to increase From
1913 to 1950 the pace of productivity growth in western Europe was roughly
the same as in the previous half century In the United States productivity
growth was more rapid than in the pre-1914 decades Productivity growth in
Japan on the other hand slowed down (see table 15)
There are three plausible reasons why productivity continued to grow in the
period under review in spite of the disruption of human and physical capital
brought about by two world wars and of the interwar globalization backlash
The 1047297rst is that the 1920s and 1930s were rich in technological innovations
A number of inventions produced by the pre-1913 ldquosecond industrial revolu-
tionrdquo had a measurable impact on aggregate output only during or after the
war This was the case for instance with regard to the internal combustion
engine the assembly line pioneered by Henry Ford and the electrical network
Table 14 Average European unemployment rates 1921ndash1993 (percent)
1921ndash1929 1930ndash1938 1950ndash1959 1960ndash1973 1974ndash1981 1982ndash1989 1990ndash1993
83 158 42 25 52 88 92
Note Arithmetic average of average annual unemployment rates 1921ndash1938 covers France Germany and the
United Kingdom for 1950ndash1993 Italy is also included
Sources For 1921ndash1938 Galenson and Zellner (1957) 455 For 1950ndash1993 Maddison (1991) 262 and OECD
data from Crafts and Toniolo (1996) 7
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983124 I 983109 983145 983123u 983120p983145v 15
and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
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983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
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983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
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983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
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The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
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large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
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983124 I 983109 983145 983123u 983120p983145v 11
As already mentioned the Soviet Union in the 1930s provided a striking
contrast to the dismal performance of most of the market economies Even
allowing for recent revisions of earlier Soviet and western estimates total GDP
growth in the Soviet Union averaged 530 percent per annum between 1928and 1940 (Allen 2003 217) in striking contrast to the dim performance of
the worldrsquos other main areas Given the record of the Soviet Unionrsquos planned
economy it is no wonder that the Third International could tout the Soviet
Unionrsquos performance as the ldquoproofrdquo of the superiority of the socialist system
nor is it surprising that many in the West prophesied the end of capitalism
including Mussolini and Hitler who preached and practiced their own sup-
posed ldquothird wayrdquo between the two systems Needless to say the subsequent
development of the world economy proved the resilience of well-run marketeconomies
The whole period stands out as one of major divisions and lack of coopera-
tion with devastating results for the pace of economic progress This is shown
among other things by the above-average performance in 1913ndash1950 of coun-
tries that remained consistently neutral such as Sweden and Switzerland
The ldquoGlobalization Backlashrdquo
It has become common for scholars to refer to the second of the quantitative
ldquostylized factsrdquo outlined abovemdashnamely the disruption of international trade
and the sharp reduction in the cross-border movements of factors of produc-
tion (capital and labor)mdashas ldquoglobalization backlashrdquo
International movements of goods services capital and labor typically
depend on two sets of factors technology which reduces transport and com-
munication costs and institutions both domestic and international that may
either favor or hinder international economic integration Transport and com-
munication technology continued to improve in the period under consider-
ation not least due to military research and developments stimulated by the
First World War Larger and more energy-ef 1047297cient ships reduced the unit cost
of sea transport Developments in the internal combustion engine provided
a competitive alternative to railways in land transport for both people and
goods A passenger airline industry took off providing ever-safer and pro-
gressively cheaper services Telephone and radio revolutionized international
communication having a particularly strong impact on 1047297nancial market inte-
gration All other things being equal therefore technology created increas-
ingly favorable conditions for cross-border economic integration Therefore
we must seek other reasons to explain why August 1914 put an end to a long
era of progressive if slow integration of the world economy an era that then
came to be known as the ldquobelle eacutepoquerdquo and that we now call ldquo1047297rst globaliza-
tionrdquo As mentioned above continuous tension misunderstandings and lack
of cooperation characterized international relations in 1919ndash1938 resulting
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in the creation of an institutional environment inimical to trade and to the
cross-border movement of peoplemdashand in the 1930s of capital as well On
the domestic front countries were busy erecting tariff and nontariff walls
limiting immigration and minutely regulating international1047297
nancial transac-tions The international monetary system painfully re-created in the 1920s
collapsed early in the next decade International economic organizations
such as the economic commission of the League of Nations and the Bank for
International Settlements were almost powerless in a context of extremely
strained international relations On balance man-made obstacles outweighed
the favorable impact of technology on international economic transactions
Pre-1913 globalization was put in reverse
In 1870ndash1913 the income elasticity of world exports was certainly greaterthan 1 and probably close to 2 In the subsequent sixteen years international
trade growth slowed down everywhere in 1929ndash1950 it almost stagnated (see
table 13) Europersquos trade performance stands out as particularly disappoint-
ing Japanrsquos exports grew rapidly in the 1920s while they decreased in the
1930s in spite of a fairly good output growth marking the shift to autarky
imposed by the military regime The export performance of the United States
was twice as good as the worldrsquos average in the 1920s While US export
performance sharply decreased in the subsequent decade it still remained wellabove average
Europe was largely responsible for the dramatic fall in international trade
growth during the Great War and the interwar years In the 1930s the volume
of western European exports actually declined Europersquos sluggish trade impact
on the Atlantic routes both North and South depressed trade from and to the
Americas as well
Table 13 Growth of value of merchandise exports at constant prices for twenty-four countries (annual average rates)
1870ndash1913 1913ndash1929 1929ndash1950 1950ndash1973 1973ndash1998
Western
Europea
323 021 ndash032 803 455
United States 486 333 168 627 598
RussiaSoviet
Union
na ndash466 308 998 295
Latin Americab 340 389 146 410 570China 259 290 006 274 1181
India 237 ndash102 ndash190 246 594
Japan 847 700 ndash097 1554 530
World 335 089 788 507
a Twelve countriesb Seven countries
Source Maddison (2001) 361ndash62
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As the result of the interwar trade trends western Europersquos share of world
exports declined from 601 percent in 1913 to 411 percent in 1950 highlight-
ing one of the structural changes in the world economy brought about by
two world wars and the Great Depression the shift of the center of the worldeconomy away from western Europe
As a feature of the interwar globalization backlash migration 1047298ows
stand out even more strikingly than trade In the century after 1820 about
55 million Europeans left the continent In the twentieth century war and
the United States Immigration Acts which introduced immigrant quotas by
national origin put an end to the ldquoage of mass migrationrdquo which was a
salient aspect of the 1047297rst globalization The depression of the 1930s with
the attendant mass unemployment in the New World further depressed the1047298ow of people crossing the Atlantic Intra-European migrations were also
somewhat reduced
If voluntary migration sharply decreased forced migration increased
highlighting the most tragic features of the European interwar history
Persecution made Jews leave central Europe in the 1930s Spaniards left for
Mexico during the Spanish Civil War Poles and Baltic people were forcibly
deported to Siberia
Cross-border capital1047298
ows reached an all-time peak in 1913 They becamea casualty of the Great War and remained depressed in the following two
decades characterized as they were by administrative controls on cross-border
monetary transactions (the so-called ldquoexchange controlsrdquo) and by uncertainty
regarding future exchange rates
The Rise in Unemployment between the Wars
High unemployment rates particularly but not exclusively in the 1930s stand
out in collective memories as the most deeply felt economic feature of the
interwar period Visual artists and writers as well as a largely diffused oral
tradition have passed on stories of homeless people long queues for a free
meal workers sitting idle outside their humble dwellings helpless families
discouraged long-term unemployed people Photographs paintings and novels
describe the Great Depression in North America and Europe in quite similar
fashions meaning that as far as unemployment is concerned in the 1930s the
contrast between the two sides of the Atlantic was not perceived to be very
pronounced On the contrary a contrast existed in the 1920s when in many
European countries a fairly large number of people were out of work while
the United States experienced almost full employment
Comparing unemployment over time and across countries is a daunting task
The term ldquounemploymentrdquo appeared for the 1047297rst time only in 1888 (Royal
Institute of International Affairs 1935 26) the compilation of of 1047297cial sta-
tistics began much later Moreover because such statistics often derived from
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983124 983127 983109 983127 98312714
the records either of those receiving some sort of bene1047297t or of those register-
ing with labor-exchange of 1047297ces they depend heavily on speci1047297c institutional
arrangements in individual countries It is thus impossible to make an accuratecomparison of the levels of interwar unemployment with those prevailing in
the quarter of a century before 1914 However there seems to be some con-
sensus among scholars that unemployment before the First World War was of
shorter average duration than that experienced after 1918
More can be said about the relative magnitude of the phenomenon in the
interwar period and the years after the Second World War Table 14 covers
only a few western European countries and may not be very precise as far as the
absolute levels of unemployment rates are concerned but it probably providesa broadly correct indication of relative variations across time (Eichengreen and
Hatton 1988 7) Exceptionally high unemployment rates stand out as a fea-
ture of the 1930s while unemployment in the 1960s was exceptionally low At
the same time the relative number of those out of work in the troubled decade
of the 1920s looks on average to be broadly comparable with that of the 1980s
and early 1990s an aspect we shall return to in the concluding chapter
Productivity Continues to Improve
While the number of unemployed rose available evidence shows that product
per hour worked by those who retained their jobs continued to increase From
1913 to 1950 the pace of productivity growth in western Europe was roughly
the same as in the previous half century In the United States productivity
growth was more rapid than in the pre-1914 decades Productivity growth in
Japan on the other hand slowed down (see table 15)
There are three plausible reasons why productivity continued to grow in the
period under review in spite of the disruption of human and physical capital
brought about by two world wars and of the interwar globalization backlash
The 1047297rst is that the 1920s and 1930s were rich in technological innovations
A number of inventions produced by the pre-1913 ldquosecond industrial revolu-
tionrdquo had a measurable impact on aggregate output only during or after the
war This was the case for instance with regard to the internal combustion
engine the assembly line pioneered by Henry Ford and the electrical network
Table 14 Average European unemployment rates 1921ndash1993 (percent)
1921ndash1929 1930ndash1938 1950ndash1959 1960ndash1973 1974ndash1981 1982ndash1989 1990ndash1993
83 158 42 25 52 88 92
Note Arithmetic average of average annual unemployment rates 1921ndash1938 covers France Germany and the
United Kingdom for 1950ndash1993 Italy is also included
Sources For 1921ndash1938 Galenson and Zellner (1957) 455 For 1950ndash1993 Maddison (1991) 262 and OECD
data from Crafts and Toniolo (1996) 7
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983124 I 983109 983145 983123u 983120p983145v 15
and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
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983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
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983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
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983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
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983124 I 983109 983145 983123u 983120p983145v 19
The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
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983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
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983124 983127 983109 983127 98312712
in the creation of an institutional environment inimical to trade and to the
cross-border movement of peoplemdashand in the 1930s of capital as well On
the domestic front countries were busy erecting tariff and nontariff walls
limiting immigration and minutely regulating international1047297
nancial transac-tions The international monetary system painfully re-created in the 1920s
collapsed early in the next decade International economic organizations
such as the economic commission of the League of Nations and the Bank for
International Settlements were almost powerless in a context of extremely
strained international relations On balance man-made obstacles outweighed
the favorable impact of technology on international economic transactions
Pre-1913 globalization was put in reverse
In 1870ndash1913 the income elasticity of world exports was certainly greaterthan 1 and probably close to 2 In the subsequent sixteen years international
trade growth slowed down everywhere in 1929ndash1950 it almost stagnated (see
table 13) Europersquos trade performance stands out as particularly disappoint-
ing Japanrsquos exports grew rapidly in the 1920s while they decreased in the
1930s in spite of a fairly good output growth marking the shift to autarky
imposed by the military regime The export performance of the United States
was twice as good as the worldrsquos average in the 1920s While US export
performance sharply decreased in the subsequent decade it still remained wellabove average
Europe was largely responsible for the dramatic fall in international trade
growth during the Great War and the interwar years In the 1930s the volume
of western European exports actually declined Europersquos sluggish trade impact
on the Atlantic routes both North and South depressed trade from and to the
Americas as well
Table 13 Growth of value of merchandise exports at constant prices for twenty-four countries (annual average rates)
1870ndash1913 1913ndash1929 1929ndash1950 1950ndash1973 1973ndash1998
Western
Europea
323 021 ndash032 803 455
United States 486 333 168 627 598
RussiaSoviet
Union
na ndash466 308 998 295
Latin Americab 340 389 146 410 570China 259 290 006 274 1181
India 237 ndash102 ndash190 246 594
Japan 847 700 ndash097 1554 530
World 335 089 788 507
a Twelve countriesb Seven countries
Source Maddison (2001) 361ndash62
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983124 I 983109 983145 983123u 983120p983145v 13
As the result of the interwar trade trends western Europersquos share of world
exports declined from 601 percent in 1913 to 411 percent in 1950 highlight-
ing one of the structural changes in the world economy brought about by
two world wars and the Great Depression the shift of the center of the worldeconomy away from western Europe
As a feature of the interwar globalization backlash migration 1047298ows
stand out even more strikingly than trade In the century after 1820 about
55 million Europeans left the continent In the twentieth century war and
the United States Immigration Acts which introduced immigrant quotas by
national origin put an end to the ldquoage of mass migrationrdquo which was a
salient aspect of the 1047297rst globalization The depression of the 1930s with
the attendant mass unemployment in the New World further depressed the1047298ow of people crossing the Atlantic Intra-European migrations were also
somewhat reduced
If voluntary migration sharply decreased forced migration increased
highlighting the most tragic features of the European interwar history
Persecution made Jews leave central Europe in the 1930s Spaniards left for
Mexico during the Spanish Civil War Poles and Baltic people were forcibly
deported to Siberia
Cross-border capital1047298
ows reached an all-time peak in 1913 They becamea casualty of the Great War and remained depressed in the following two
decades characterized as they were by administrative controls on cross-border
monetary transactions (the so-called ldquoexchange controlsrdquo) and by uncertainty
regarding future exchange rates
The Rise in Unemployment between the Wars
High unemployment rates particularly but not exclusively in the 1930s stand
out in collective memories as the most deeply felt economic feature of the
interwar period Visual artists and writers as well as a largely diffused oral
tradition have passed on stories of homeless people long queues for a free
meal workers sitting idle outside their humble dwellings helpless families
discouraged long-term unemployed people Photographs paintings and novels
describe the Great Depression in North America and Europe in quite similar
fashions meaning that as far as unemployment is concerned in the 1930s the
contrast between the two sides of the Atlantic was not perceived to be very
pronounced On the contrary a contrast existed in the 1920s when in many
European countries a fairly large number of people were out of work while
the United States experienced almost full employment
Comparing unemployment over time and across countries is a daunting task
The term ldquounemploymentrdquo appeared for the 1047297rst time only in 1888 (Royal
Institute of International Affairs 1935 26) the compilation of of 1047297cial sta-
tistics began much later Moreover because such statistics often derived from
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983124 983127 983109 983127 98312714
the records either of those receiving some sort of bene1047297t or of those register-
ing with labor-exchange of 1047297ces they depend heavily on speci1047297c institutional
arrangements in individual countries It is thus impossible to make an accuratecomparison of the levels of interwar unemployment with those prevailing in
the quarter of a century before 1914 However there seems to be some con-
sensus among scholars that unemployment before the First World War was of
shorter average duration than that experienced after 1918
More can be said about the relative magnitude of the phenomenon in the
interwar period and the years after the Second World War Table 14 covers
only a few western European countries and may not be very precise as far as the
absolute levels of unemployment rates are concerned but it probably providesa broadly correct indication of relative variations across time (Eichengreen and
Hatton 1988 7) Exceptionally high unemployment rates stand out as a fea-
ture of the 1930s while unemployment in the 1960s was exceptionally low At
the same time the relative number of those out of work in the troubled decade
of the 1920s looks on average to be broadly comparable with that of the 1980s
and early 1990s an aspect we shall return to in the concluding chapter
Productivity Continues to Improve
While the number of unemployed rose available evidence shows that product
per hour worked by those who retained their jobs continued to increase From
1913 to 1950 the pace of productivity growth in western Europe was roughly
the same as in the previous half century In the United States productivity
growth was more rapid than in the pre-1914 decades Productivity growth in
Japan on the other hand slowed down (see table 15)
There are three plausible reasons why productivity continued to grow in the
period under review in spite of the disruption of human and physical capital
brought about by two world wars and of the interwar globalization backlash
The 1047297rst is that the 1920s and 1930s were rich in technological innovations
A number of inventions produced by the pre-1913 ldquosecond industrial revolu-
tionrdquo had a measurable impact on aggregate output only during or after the
war This was the case for instance with regard to the internal combustion
engine the assembly line pioneered by Henry Ford and the electrical network
Table 14 Average European unemployment rates 1921ndash1993 (percent)
1921ndash1929 1930ndash1938 1950ndash1959 1960ndash1973 1974ndash1981 1982ndash1989 1990ndash1993
83 158 42 25 52 88 92
Note Arithmetic average of average annual unemployment rates 1921ndash1938 covers France Germany and the
United Kingdom for 1950ndash1993 Italy is also included
Sources For 1921ndash1938 Galenson and Zellner (1957) 455 For 1950ndash1993 Maddison (1991) 262 and OECD
data from Crafts and Toniolo (1996) 7
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983124 I 983109 983145 983123u 983120p983145v 15
and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
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983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
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983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
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983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
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983124 I 983109 983145 983123u 983120p983145v 19
The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
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983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
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983124 I 983109 983145 983123u 983120p983145v 13
As the result of the interwar trade trends western Europersquos share of world
exports declined from 601 percent in 1913 to 411 percent in 1950 highlight-
ing one of the structural changes in the world economy brought about by
two world wars and the Great Depression the shift of the center of the worldeconomy away from western Europe
As a feature of the interwar globalization backlash migration 1047298ows
stand out even more strikingly than trade In the century after 1820 about
55 million Europeans left the continent In the twentieth century war and
the United States Immigration Acts which introduced immigrant quotas by
national origin put an end to the ldquoage of mass migrationrdquo which was a
salient aspect of the 1047297rst globalization The depression of the 1930s with
the attendant mass unemployment in the New World further depressed the1047298ow of people crossing the Atlantic Intra-European migrations were also
somewhat reduced
If voluntary migration sharply decreased forced migration increased
highlighting the most tragic features of the European interwar history
Persecution made Jews leave central Europe in the 1930s Spaniards left for
Mexico during the Spanish Civil War Poles and Baltic people were forcibly
deported to Siberia
Cross-border capital1047298
ows reached an all-time peak in 1913 They becamea casualty of the Great War and remained depressed in the following two
decades characterized as they were by administrative controls on cross-border
monetary transactions (the so-called ldquoexchange controlsrdquo) and by uncertainty
regarding future exchange rates
The Rise in Unemployment between the Wars
High unemployment rates particularly but not exclusively in the 1930s stand
out in collective memories as the most deeply felt economic feature of the
interwar period Visual artists and writers as well as a largely diffused oral
tradition have passed on stories of homeless people long queues for a free
meal workers sitting idle outside their humble dwellings helpless families
discouraged long-term unemployed people Photographs paintings and novels
describe the Great Depression in North America and Europe in quite similar
fashions meaning that as far as unemployment is concerned in the 1930s the
contrast between the two sides of the Atlantic was not perceived to be very
pronounced On the contrary a contrast existed in the 1920s when in many
European countries a fairly large number of people were out of work while
the United States experienced almost full employment
Comparing unemployment over time and across countries is a daunting task
The term ldquounemploymentrdquo appeared for the 1047297rst time only in 1888 (Royal
Institute of International Affairs 1935 26) the compilation of of 1047297cial sta-
tistics began much later Moreover because such statistics often derived from
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
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983124 983127 983109 983127 98312714
the records either of those receiving some sort of bene1047297t or of those register-
ing with labor-exchange of 1047297ces they depend heavily on speci1047297c institutional
arrangements in individual countries It is thus impossible to make an accuratecomparison of the levels of interwar unemployment with those prevailing in
the quarter of a century before 1914 However there seems to be some con-
sensus among scholars that unemployment before the First World War was of
shorter average duration than that experienced after 1918
More can be said about the relative magnitude of the phenomenon in the
interwar period and the years after the Second World War Table 14 covers
only a few western European countries and may not be very precise as far as the
absolute levels of unemployment rates are concerned but it probably providesa broadly correct indication of relative variations across time (Eichengreen and
Hatton 1988 7) Exceptionally high unemployment rates stand out as a fea-
ture of the 1930s while unemployment in the 1960s was exceptionally low At
the same time the relative number of those out of work in the troubled decade
of the 1920s looks on average to be broadly comparable with that of the 1980s
and early 1990s an aspect we shall return to in the concluding chapter
Productivity Continues to Improve
While the number of unemployed rose available evidence shows that product
per hour worked by those who retained their jobs continued to increase From
1913 to 1950 the pace of productivity growth in western Europe was roughly
the same as in the previous half century In the United States productivity
growth was more rapid than in the pre-1914 decades Productivity growth in
Japan on the other hand slowed down (see table 15)
There are three plausible reasons why productivity continued to grow in the
period under review in spite of the disruption of human and physical capital
brought about by two world wars and of the interwar globalization backlash
The 1047297rst is that the 1920s and 1930s were rich in technological innovations
A number of inventions produced by the pre-1913 ldquosecond industrial revolu-
tionrdquo had a measurable impact on aggregate output only during or after the
war This was the case for instance with regard to the internal combustion
engine the assembly line pioneered by Henry Ford and the electrical network
Table 14 Average European unemployment rates 1921ndash1993 (percent)
1921ndash1929 1930ndash1938 1950ndash1959 1960ndash1973 1974ndash1981 1982ndash1989 1990ndash1993
83 158 42 25 52 88 92
Note Arithmetic average of average annual unemployment rates 1921ndash1938 covers France Germany and the
United Kingdom for 1950ndash1993 Italy is also included
Sources For 1921ndash1938 Galenson and Zellner (1957) 455 For 1950ndash1993 Maddison (1991) 262 and OECD
data from Crafts and Toniolo (1996) 7
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983124 I 983109 983145 983123u 983120p983145v 15
and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
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983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
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983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
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983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
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The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
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983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
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983124 983127 983109 983127 98312714
the records either of those receiving some sort of bene1047297t or of those register-
ing with labor-exchange of 1047297ces they depend heavily on speci1047297c institutional
arrangements in individual countries It is thus impossible to make an accuratecomparison of the levels of interwar unemployment with those prevailing in
the quarter of a century before 1914 However there seems to be some con-
sensus among scholars that unemployment before the First World War was of
shorter average duration than that experienced after 1918
More can be said about the relative magnitude of the phenomenon in the
interwar period and the years after the Second World War Table 14 covers
only a few western European countries and may not be very precise as far as the
absolute levels of unemployment rates are concerned but it probably providesa broadly correct indication of relative variations across time (Eichengreen and
Hatton 1988 7) Exceptionally high unemployment rates stand out as a fea-
ture of the 1930s while unemployment in the 1960s was exceptionally low At
the same time the relative number of those out of work in the troubled decade
of the 1920s looks on average to be broadly comparable with that of the 1980s
and early 1990s an aspect we shall return to in the concluding chapter
Productivity Continues to Improve
While the number of unemployed rose available evidence shows that product
per hour worked by those who retained their jobs continued to increase From
1913 to 1950 the pace of productivity growth in western Europe was roughly
the same as in the previous half century In the United States productivity
growth was more rapid than in the pre-1914 decades Productivity growth in
Japan on the other hand slowed down (see table 15)
There are three plausible reasons why productivity continued to grow in the
period under review in spite of the disruption of human and physical capital
brought about by two world wars and of the interwar globalization backlash
The 1047297rst is that the 1920s and 1930s were rich in technological innovations
A number of inventions produced by the pre-1913 ldquosecond industrial revolu-
tionrdquo had a measurable impact on aggregate output only during or after the
war This was the case for instance with regard to the internal combustion
engine the assembly line pioneered by Henry Ford and the electrical network
Table 14 Average European unemployment rates 1921ndash1993 (percent)
1921ndash1929 1930ndash1938 1950ndash1959 1960ndash1973 1974ndash1981 1982ndash1989 1990ndash1993
83 158 42 25 52 88 92
Note Arithmetic average of average annual unemployment rates 1921ndash1938 covers France Germany and the
United Kingdom for 1950ndash1993 Italy is also included
Sources For 1921ndash1938 Galenson and Zellner (1957) 455 For 1950ndash1993 Maddison (1991) 262 and OECD
data from Crafts and Toniolo (1996) 7
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983124 I 983109 983145 983123u 983120p983145v 15
and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
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983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1215
983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1315
983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1415
983124 I 983109 983145 983123u 983120p983145v 19
The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1515
983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1015
983124 I 983109 983145 983123u 983120p983145v 15
and motor The latter was a typical ldquogeneral purpose innovationrdquo capable of
application in a large number of production processes The second reason for
continued productivity growth in the interwar years is probably traceable to
the continuation of the prewar trend of extending elementary and second-
ary education to an ever-larger number of people and of investing in higher
education Investment in education typically has a lagged impact on the stock
of human capital and thus on productivity growth but if sustained is a major
source of long-term growth in output per hour worked Finally productivity
growth in the 1930s might also have been the unintended consequence of
unemployment itself as layoffs tend to affect the least productive members of
the workforce
Whatever caused it the observed trend in productivity growth is interesting
and important for at least two reasons First it reinforces one of the main
contentions of this book that slow growth and depression were man-made
rather than ldquonaturalrdquo phenomena Second it explains at least in part the
extraordinary growth rates of the years after the Second World War Once
man-made obstacles were removed the European economies could exploit a
vast backlog of accumulated technical knowledge and human capital
Output Growth Belligerents and Neutrals
In this brief quantitative survey we have so far considered Europe as an
aggregate But over the interwar period nation-states actually reinforced
their protagonist role The dissolution of four large empires (the Russian
Prussian Austro-Hungarian and Ottoman empires) between 1917 and 1919
resulted in the addition of a number of new independent states to the prewar
lot Nation-states received ideological support from the Wilsonian ideology and
a full international endorsement at the Versailles Peace Conference Moreover
in retaining or gaining full economic sovereignty it was the nation-state that
was responsible for policies affecting economic growth Tense relations between
Table 15 Growth of productivity 1870ndash1998 selected areas (average annual
rate of growth)
1870ndash1913 1913ndash1950 1950ndash1973 1973ndash1990 1990ndash1998
Western
Europea
155 156 477 229 216
United
States
192 248 277 141 174
Japan 199 180 774 297 213
Note Productivity is de1047297ned as real GDP per hour workeda Twelve countries
Source Maddison (2001) 352
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1115
983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1215
983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
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983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1415
983124 I 983109 983145 983123u 983120p983145v 19
The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1515
983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1115
983124 983127 983109 983127 98312716
nation-states were also responsible for the autarkic trends that disrupted the
international economy
Table 16 shows the growth rates of nine European countries the United
States Canada and Japan during 1913ndash1950 and two relevant subperiodsThe 1047297rst column in the table covers the full period 1913ndash1950 Countries are
ranked by growth order starting from the slowest No simple organizing prin-
ciple is possible here given the length and complexity of the period growth
rates were the result of participation or neutrality in one or both world wars
the speed of respective recoveries monetary and exchange-rate policies semi-
planned fascist economies and other factors However one obvious prima
facie observation is possible two of the fastest-growing countries Sweden and
Switzerland remained neutral during both the First and the Second WorldWars and two others Finland and Norway were neutral in the 1047297rst con1047298ict
The second column covers the years from 1913 to 1929 Here countries are
classi1047297ed according to their participation in the Great War the most important
single factor to affect individual performances at least during the 1047297rst half of
the decade The results are quite indicative neutrals outperform all winners
while the winners (with the possible exception of the United Kingdom) do bet-
ter than the cores of the two pre-1918 central empires that were defeated in the
war and lost signi1047297
cant parts of their territories The third column takes intoaccount the most important item in the economic policies of the 1930 namely
the adherence to the gold standard until 1935ndash1936 or its early demise in
1931 Here too the results are quite suggestive Those who left gold de1047297nitely
outperform the members of the gold bloc and Switzerland Germany is listed
under ldquootherrdquo because its currency remained only formally anchored to gold
while in practice policy makers were quite successful at insulating the country
from the de1047298ationary effects of the gold-standard rules
It goes without saying that the associations in table 16 cannot be takenas proofs of causal links At best they may be suggestive of research hypoth-
eses If so they indicate again that in order to understand the slowdown in
modern economic growth experienced in the period of our study it is appro-
priate to explore 1047297rst and foremost the effects of the war and of ill-advised
economic policies In this vein we have selected four relevant propositions
from among the large number of explanations scholars have provided for the
poor performance of the European economy during the interwar years
13 Two Propositions about International EconomicOrganization
Structural Imbalances and the End of Empires
The traditional explanation for the depth and persistence of widespread
postwar dif 1047297culties is the problem of ldquostructural imbalancerdquo within and
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1215
983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1315
983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1415
983124 I 983109 983145 983123u 983120p983145v 19
The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1515
983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1215
983124 I 983109 983145 983123u 983120p983145v 17
between countries The origins of this dislocation are found in the changes
in the composition of production and demand resulting from the wartime
disruption of international trade from the geopolitical effects of the Treaty
of Versailles and from postwar changes in technology and patterns of
demand
Although the effects of these changes are not always clearly spelled out
they may be taken to relate particularly to a misallocation of resources that
was responsible for the high rate of unemployment in Europe in the 1920s and
that also made the adjustment process longer and more costly The effects of
these structural changes were felt in both labor markets and product markets
in each of which it is argued there was appreciably less 1047298exibility after 1918
(Svennilson 1954)
In eastern Europe and beyond the collapse of the Austro-Hungarian
Ottoman and Russian empires created entirely new conditions for a whole
region This part of the world is geologically unstable as it sits on top of the
fault that created the Great Rift Valley in Africa and oil deposits farther north
The region turned out to be unstable politically as well in the early twentieth
century as the rulers of these empires tried to compete with the more indus-
trial countries in the First World War Mobilization in these largely agrarian
Table 16 Growth in real GDP selected European countries the United
States Canada and Japan 1913ndash1950 (average annual rate of growth)
1913ndash1950 1913ndash1929 1929ndash1938
WWI neutrals Off gold in 1931Austria 02 Sweden 19 UK 19
Belgium 10 Finland 24 Denmark 22
Germany 11 Denmark 27 Sweden 26
France 12 Switzerland 28 Norway 31
UK 13 Norway 29 Finland 39
Italy 15 Netherlands 36
Netherlands 24 Gold blocDenmark 25 WWI winners France ndash04
Switzerland 26 UK 07 Belgium 00Finland 27 Belgium 14 Netherlands 03
Sweden 27 Italy 17 Switzerland 06
Norway 29 France 19 Italy 16
WWI losers OtherAustria 03 Austria ndash03
Germany 12 Germany 2 5
Extra-Europe Japan 22 Canada 25 United States ndash06
United States 28 Japan 37 Canada 00
Canada 29 United States 31 Japan 36
Source Maddison (1995) 180ndash83
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1315
983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1415
983124 I 983109 983145 983123u 983120p983145v 19
The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1515
983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1315
983124 983127 983109 983127 98312718
economies stripped the country of productive resources leading to food short-
ages in major cities The results were civil disturbances and the collapse of
traditional governing structures (Broadberry and Harrison 2005)
As a result of these far-reaching changes there were many new countriesled by inexperienced leaders in the interwar years The results were inauspi-
cious in most cases leading to economic chaos in the form of hyperin1047298ations
in some cases and less severe problems in others The Soviet successors to the
old Russian Empire separated themselves from much of the economic activity
we will describe here although we will also discuss developments in the Soviet
sphere Other successor countries struggled for independence and stability
leading to the interaction of economics and politics that is the subject of our
second propositionCon1047298ict in Asia both within China and between China and Japan impeded
economic growth and prosperity there too The collapse of the Chinese Empire
was not as closely tied to the war as was the collapse of the empires nearer to
the actual con1047298ict The coincidence in timing however suggests that some
of the same forces were at work China was doubly disadvantaged by having
inexperienced leaders at home and an aggressive Japan on its doorstep As we
will describe later Japanrsquos recovery from the Great Depression led to its inva-
sion of China which impeded economic progress there
Politics and Economics
The lack of leadership by governments central banks and international institu-
tions in the operation of the restored gold standardmdashand more generally in
international economic policy makingmdashhas been noted by Brown (1940) and
Kindleberger (1973) The proposition is summed up in the phrase ldquono longer
London not yet Washingtonrdquo The diminished political military and 1047297nancial
status of the United Kingdom meant that London was unable to act as sole
conductor of the international orchestra (or in more modern terminology to
operate as the ldquohegemonrdquo) while the United States was not yet willing to take
over this role despite the enormous improvement in its international standing
The ability of London to perform its traditional role as the dominant eco-
nomic power was further undermined by the strength of Francersquos relative
1047297nancial position after the stabilization of the franc in 1926 and the large
accumulation of gold by the Bank of France Lack of leadership manifested
itself in a number of crucial political and economic areas where consensus
could not be reached The failure of the numerous economic conferences the
fruitless disarmament efforts and the unresolved issue of German repara-
tions are all cases in point The speci1047297c 1047297nancial manifestation of this lack
of leadership was that there was no country able and willing to stabilize
the global monetary environment for instance by acting as an international
lender-of-last resort
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1415
983124 I 983109 983145 983123u 983120p983145v 19
The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1515
983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1415
983124 I 983109 983145 983123u 983120p983145v 19
The lack of leadership was compounded by the absence of international
cooperation between the United States Britain France and Germany and the
failure of the major nations to coordinate their domestic economic policies
Clarke (1967) argued this speci1047297
cally in relation to the period from mid-1928to the collapse of the gold standard in 1931 claiming that after the 1928 death
of Benjamin Strong governor of the Federal Reserve Bank of New York the
central bankers failed to achieve the necessary coordination of policy Friedman
and Schwartz (1963) writing about the United States gave even more weight
to Strongrsquos unfortunate death
More generally Eichengreen (1985 1992a) suggested lack of cooperation
as a central feature of the entire period manifested particularly in the attempt
of each of the main powers to secure for itself a disproportionate share of theworldrsquos limited stocks of monetary gold Prior to the collapse of the gold stan-
dard in 1931 their uncooperative behavior involved the imposition of tight
monetary policies not only by countries in de1047297cit but also by those that were
in surplus notably the United States and France This added to the de1047298ationary
pressures on the world economy and increased the vulnerability of the weak
currencies such as the pound sterling and the mark to speculative attack
In other variants on this theme the shortcomings of the interwar adjust-
ment mechanism are explained by the unwillingness of central banks to oper-ate the gold standard according to the ldquorules of the gamerdquo under which all
movements in gold should have been fully re1047298ected in compensating changes
in domestic money supplies The main reason for this tendency to neutralize
changes in gold and foreign-exchange reserves rather than allowing them to
in1047298uence internal monetary conditions was that postwar governments were
no longer willing to give unconditional support to external equilibrium and
the defense of the reserves due to the increased political cost of the necessary
measuresDemocratic electorates increasingly required that governments should attach
greater weight to internal stability of prices and incomes ldquoWhen the precepts
of the gold standard ran counter to the requirements of domestic monetary
stability it was the latter that usually prevailedrdquo wrote Nurske (1944 105)
But the new position was not entirely symmetrical there was always greater
pressure to neutralize an out1047298ow of gold than an in1047298ow and this imparted a
de1047298ationary bias to the whole system
The inability of the powers to cooperate was dramatically symbolized at
the World Monetary Conference in the summer of 1933 which met in London
shortly after the United States had abandoned the gold standard and allowed
the dollar to depreciate The gathering had been speci1047297cally convened to pro-
mote the coordinated stabilization of exchange rates but in the middle of the
proceedings Roosevelt announced that he was not yet willing to stabilize the
dollar He brusquely dismissed ldquothe specious fallacy of achieving a temporary
and probably an arti1047297cial stability in foreign exchanges on the part of a few
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1515
983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative
7242019 The World Economy Between World Wars- Chapter 1 (Appless Conflicted Copy 2015-04-14)
httpslidepdfcomreaderfullthe-world-economy-between-world-wars-chapter-1-appless-conflicted-copy 1515
983124 983127 983109 983127 98312720
large countries onlyrdquo (Hodson 1938 194) This disastrous meeting starkly
exposed the total lack of any common ground between countries and hastened
the further disintegration of the international monetary system With global
political relations also deteriorating rapidly the decade witnessed an epidemicof competitive currency depreciation extended resort to exchange controls the
rise of protectionism bilateralism import quotas and other barriers to trade
and the development of hostile noncooperating trade and currency blocs
Finally even when leaders acted responsibly and cooperation was tried
problems arose from the hold that old-fashioned political and 1047297nancial ide-
ologies exerted on policy-makers The former is seen as responsible for the
insistence on substantial reparations This produced a new pattern of interna-
tional settlements that made the smooth functioning of international paymentsdependent upon the capability and willingness of the United States to continue
lending to Europe inde1047297nitely The destabilizing potential of this ldquoarrange-
mentrdquo is self-evident Still more important was the 1047297nancial ideology re1047298ected
in the priority attached to the reintroduction of the gold standard even where
this could only be achieved by subjecting the economy to a severe program
of de1047298ation and obstructing future trade by the imposition of an overvalued
currency
Under the discipline that this doctrine enjoinedmdashor the values it impliedmdashcountry after country surrendered its ldquomonetary sovereigntyrdquo and restricted its
ability to accommodate balance-of-payments disturbances by any means other
than retrenchment The consequences of this situation became apparent in the
early 1930s when the constraints of the gold standard prevented countries from
initiating policies to alleviate economic distress and even induced some coun-
tries to pursue policies that intensi1047297ed the economic decline (Temin 1989)
We shall return to these two propositions and discuss their validity and
applicability at appropriate points in the subsequent narrative